A variation of Sharpe that only penalizes downside volatility. It is calculated as (strategy return – target return) divided by the standard deviation of negative (below-target) returns. In trading, target return is often zero or risk-free. Sortino focuses on harmful volatility. A higher Sortino means better downside-risk-adjusted returns. For example, a Sortino of 2.0 implies each unit of downside volatility yielded twice the return. It’s preferred over Sharpe if one believes only losses (not upswing volatility) should affect risk assessment.

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