Sortino ratio is a variation of the Sharpe ratio, with only difference it uses the downside deviation instead standard deviation in Sharpe ratio. Frank A. Sortino developed Sortino ratio in order to differentiate good volatility from harmful volatility in Sharpe ratio.
By creating his own ratio, Sortino managed to avoid both upside and downside volatility penalization, while focusing only on returns falling below a user-specified target.
Sortino is calculated by following equation:
Sortino Ratio= Expected Return - Risk Free Rate of Return / Downside Risk
Large Sortino ratio implies low risk of possible large losses.
