Question

If two portfolios have the exact same total return and total volatility, why might the one with a higher Sortino Ratio be considered safer by a professional?

Accepted Answer

To understand why one portfolio is safer, you have to look at what &#x27;volatility&#x27; actually measures. Volatility is just a measure of how much an investment&#x27;s price jumps up and down. Standard measures treat all jumps the same, whether they go up or down. But you only lose money when the price goes down. The Sortino Ratio is a tool that ignores the &#x27;good&#x27; jumps that go up and only looks at the &#x27;bad&#x27; jumps that go down. This is called downside deviation. If two portfolios have the same total volatility but different Sortino Ratios, it means the one with the higher ratio has fewer painful drops. Imagine two roller coasters that shake the same amount, but one only shakes when it is going up, while the other shakes when it is dropping toward the ground; you would feel much safer on the first one. Because the Sortino Ratio ignores the price spikes you actually enjoy, a higher number tells a professional that the portfolio is less prone to scary, losing drops.

If two portfolios have the exact same total return and total volatility, why might the one with a higher Sortino Ratio be considered safer by a professional?

To understand why one portfolio is safer, you have to look at what 'volatility' actually measures. Volatility is just a measure of how much an investment's price jumps up and down. Standard measures treat all jumps the same, whether they go up or down. But you only lose money when the pri....

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If two portfolios have the exact same total return and total volatility, why might the one with a higher Sortino Ratio be considered safer by a professional?

To understand why one portfolio is safer, you have to look at what 'volatility' actually measures. Volatility is just a measure of how much an investment's price jumps up and down. Standard measures treat all jumps the same, whether they go up or down. But you only lose money when the pri....

Community Answers