Which measurement focuses on downside performance?

Which measurement focuses on downside performance?

• A. Sharpe Ratio
• B. Sortino Ratio
• C. Treynor Ratio
• D. Information Ratio

Answer: (B)

The Sortino Ratio is designed specifically to measure downside risk, which sets it apart from other performance metrics. Unlike the Sharpe Ratio, which considers overall volatility, the Sortino Ratio only penalizes negative returns while ignoring positive fluctuations. This focus on downside performance allows investors to assess how well an investment compensates for potential losses rather than just its overall return variability. By concentrating on the downside, the Sortino Ratio provides a clearer picture of an investment's performance in unfavorable market conditions. This makes it particularly useful for risk-averse investors who prioritize capital preservation and seek to minimize negative outcomes rather than simply maximizing returns. The Sharpe Ratio, on the other hand, incorporates both upside and downside volatility, making it less efficient for evaluating performance in terms of downside risk specifically. Similarly, the Treynor Ratio assesses returns relative to systematic risk, while the Information Ratio evaluates active management performance against a benchmark, both of which do not focus exclusively on downside outcomes. Thus, the Sortino Ratio is the most appropriate measurement for this specific focus on downside performance.

The Sortino Ratio is designed specifically to measure downside risk, which sets it apart from other performance metrics. Unlike the Sharpe Ratio, which considers overall volatility, the Sortino Ratio only penalizes negative returns while ignoring positive fluctuations. This focus on downside performance allows investors to assess how well an investment compensates for potential losses rather than just its overall return variability.

By concentrating on the downside, the Sortino Ratio provides a clearer picture of an investment's performance in unfavorable market conditions. This makes it particularly useful for risk-averse investors who prioritize capital preservation and seek to minimize negative outcomes rather than simply maximizing returns.

The Sharpe Ratio, on the other hand, incorporates both upside and downside volatility, making it less efficient for evaluating performance in terms of downside risk specifically. Similarly, the Treynor Ratio assesses returns relative to systematic risk, while the Information Ratio evaluates active management performance against a benchmark, both of which do not focus exclusively on downside outcomes. Thus, the Sortino Ratio is the most appropriate measurement for this specific focus on downside performance.