Unlike the Sharpe ratio and the Treynor ratio, which are both risk-adjusted ratios, the Sortino ratio is based on the concept of the minimum acceptable return (MAR) for a particular investment and thus focuses on Downside risk.
The ratio represents the fund manager's ability to generate excess return compared to risk-free investments, given the loss profile entered.
From an analytical viewpoint, it is the ratio between the difference between a portfolio’s return and a risk-free investment and the downside risk.
A high ratio value indicates that the variability of the returns is (mostly) not concentrated below the MAR.
The Sortino ratio was named after the economist Frank A. Sortino.
