Sortino & Downside Risk

SortinoReturn per unit of downside risk only. exists because of a simple, obvious truth SharpeReturn per unit of risk — the standard risk-adjusted measure. ignores: *investors don’t fearThe two emotions that move markets and ruin accounts. volatilityThe size of price swings — not their direction. — they fearThe two emotions that move markets and ruin accounts. losses. A big upside* surge is “volatilityThe size of price swings — not their direction.” too, and SharpeReturn per unit of risk — the standard risk-adjusted measure. penalises it as if it were risk — which is absurd; nobody complains about their account jumping up. SortinoReturn per unit of downside risk only. corrects this by counting only downside deviation, so a strategy with explosive upside and gentle downside (exactly what you want) is rewarded, not punished. This makes Sortino especially fair for asymmetric strategies — like trendThe prevailing direction of price: up, down or sideways.-following, which has many small losses and rare huge wins, and which Sharpe unfairly dings for its “volatile” big winners. The principle: measure risk as the thing you actually care about — the chance and depth of losing money — not the harmless excitement of winning big.