Schuler Capital Management LLC
  • Approach
    • What Makes Us Different
    • How We Work With Clients
    • About Us
  • Risk Model
    • Safeguard 1st Risk Model
    • Why Does It Work?
    • Risk Management vs Market Timing
    • Key Takeaways
    • What Is Safeguard 1st Telling Us Now? >
      • Current Safeguard 1st Signals
  • Strategies
    • Safeguard 1st Strategy
    • Large Cap Momentum Strategy
    • Small Cap Momentum Strategy
    • Custom Strategies
  • Reasons Why
    • Buy & Hold May Not Always Be Best
    • The Achilles Heel of the 60/40 Portfolio
    • Is Your Portfolio Really Diversified?
    • Gradually Shifting Asset Allocations Doesn't Effectively Manage Risk
    • Cash Is Not Trash
    • Fees Matter
    • What To Know About Track Records
  • Technical
    • Backtesting Methodology & Results >
      • Backtesting Description
      • Indicators & Risk Model: Description & Development
      • Safeguard 1st - Backtest Results
      • Large Cap Mo - Backtest Results
      • Small Cap Mo - Backtest Results
      • Dividend & Interest Assumptions
      • Transaction Cost Assumptions
    • Data Facts
    • Definitions >
      • Alpha
      • Beta
      • Black Swan
      • Correlation
      • Drawdown
      • Efficient Mkt Hypothesis
      • Market Timing
      • Profit Factor
      • Risk
    • More...Definitions >
      • Risk Measures >
        • Sharpe Ratio
        • Sortino Ratio
        • Standard Deviation
        • Volatility
      • R-Squared
    • Diversifying Company Risk
    • Momentum
    • Stop Loss Dangers
    • Tax Considerations
    • Timing of Signals/Trades
    • Using Our Charts/Tables
  • Approach
    • What Makes Us Different
    • How We Work With Clients
    • About Us
  • Risk Model
    • Safeguard 1st Risk Model
    • Why Does It Work?
    • Risk Management vs Market Timing
    • Key Takeaways
    • What Is Safeguard 1st Telling Us Now? >
      • Current Safeguard 1st Signals
  • Strategies
    • Safeguard 1st Strategy
    • Large Cap Momentum Strategy
    • Small Cap Momentum Strategy
    • Custom Strategies
  • Reasons Why
    • Buy & Hold May Not Always Be Best
    • The Achilles Heel of the 60/40 Portfolio
    • Is Your Portfolio Really Diversified?
    • Gradually Shifting Asset Allocations Doesn't Effectively Manage Risk
    • Cash Is Not Trash
    • Fees Matter
    • What To Know About Track Records
  • Technical
    • Backtesting Methodology & Results >
      • Backtesting Description
      • Indicators & Risk Model: Description & Development
      • Safeguard 1st - Backtest Results
      • Large Cap Mo - Backtest Results
      • Small Cap Mo - Backtest Results
      • Dividend & Interest Assumptions
      • Transaction Cost Assumptions
    • Data Facts
    • Definitions >
      • Alpha
      • Beta
      • Black Swan
      • Correlation
      • Drawdown
      • Efficient Mkt Hypothesis
      • Market Timing
      • Profit Factor
      • Risk
    • More...Definitions >
      • Risk Measures >
        • Sharpe Ratio
        • Sortino Ratio
        • Standard Deviation
        • Volatility
      • R-Squared
    • Diversifying Company Risk
    • Momentum
    • Stop Loss Dangers
    • Tax Considerations
    • Timing of Signals/Trades
    • Using Our Charts/Tables
Sortino Ratio
 
Even though it is widely used, the Sharpe Ratio has a flaw:  it includes not only the downside volatility (the part we really care about), but also the upside volatility (the part we would like to have!).  The Sortino Ratio corrects for this by modifying the Sharpe Ratio.  It uses the downside deviation rather than standard deviation as the measure of risk — i.e., only those returns falling below a user- specified target (“Desired Target Return”) are considered risky.  Movements cause by upside volatility -- prices moving higher -- are ignored.
 
In other words, the Sortino Ratio only uses downside moves in its volatility measure.  The Sharpe Ratio includes deviations both above and below the average returns.
 
The Sortino Ratio is generally a better measure of risk-adjusted returns than the Sharpe Ratio and like the Sharpe Ratio, the higher its value compared with its benchmark, the better the risk-adjusted returns are.
 
Click here for a good paper of the Sharpe vs Sortino Ratios.
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