The Sortino ratio is a powerful tool for traders looking to maximize their returns on the foreign exchange (forex) market. By measuring the potential of downside deviation relative to expected returns, it helps eliminate unwanted risk and increase profitability for forex strategists. In this article, we look at what Sortino ratio is, how it measures risk, and how it can be used to analyze and improve forex trading strategies. The Sharpe-Sortino ratio is a risk-adjusted return metric that measures the risk-adjusted performance of an investment by comparing its excess return versus the required rate of return, relative to the amount of downside risk. It is generally used to assess investment strategies but may be applicable to any type of asset management.
The Sharpe-Sortino ratio takes account of both upside and downside risk, unlike the Sharpe ratio, which only considers upside potential. This is done by incorporating the volatility of negative returns into the calculation.
The Sharpe-Sortino ratio is calculated by subtracting the risk-free rate from the excess return of the investment and dividing it by the downside risk, measured by the Sortino ratio. The result is then multiplied by the square root of the time period used in the calculation.
The Sortino ratio is a variation of the Sharpe ratio; the only difference is that in the Sortino ratio, only the downside volatility is considered when calculating the return. This makes the Sortino ratio much better than the Sharpe ratio when it comes to measuring risk-adjusted performance.
The Sharpe-Sortino ratio is an important tool that investors use to measure risk-adjusted returns in different investments. It is important for investors to understand how different investments impact their portfolios in order to make sound investing decisions.