What is the formula for the Sortino ratio?

The Sortino ratio is a performance measurement tool that focuses specifically on the downside risk of an investment, making it particularly useful for investors who are concerned about negative returns. The formula for the Sortino ratio is defined as the excess return of the portfolio over a minimum acceptable return, divided by the downside deviation.

In this context, the excess return is calculated as the return of the portfolio minus the minimum acceptable return (often set as the target return or a benchmark). The downside deviation measures the volatility of returns that fall below this minimum acceptable return, emphasizing only the negative fluctuations rather than total volatility.

This focus on downside risk distinguishes the Sortino ratio from other performance metrics, such as the Sharpe ratio, which considers total volatility. Therefore, the correct formulation as presented aligns with the definition and calculation method of the Sortino ratio, making it the right choice.