What is Sortino Ratio and how is it calculated?

sortino ratio is a variation of the commonly used sharpe ratio to assess the risk of an investment or trading strategy compared to its past or expected returns the main difference between the two is that while sharpe uses the total standard deviation or volatility of monthly returns for its calculations, sortino isolates the downside deviation of portfolio returns this leads to a measurement that's not negatively impacted by excess profitable returns like sharpe ratio, sortino ratio aims to measure the consistency of returns but its score is not penalized by the deviation of profitable returns, this is commonly referred to as good risk this ratio is calculated by subtracting the risk free rates from the expected returns and dividing the result by the downside deviation of the former a higher sortino value demonstrates high consistency of returns month over month when compared to a lower sortino value strategy here's how we calculate sortino ratio typically, this ratio is calculated using annual values, but this method doesn't provide reliable results in cryptocurrency investments or trading strategies due to a lack of sufficiently lengthy market data to solve this issue, we calculate sortino using monthly returns for increased accuracy we've also assumed a risk free rate of 8% for our calculations based on the current lowest risk investment market offerings, stable coin staking platforms such as nexo, blockfi, celsius (mean monthly % returns monthly risk free rate (8%/12)) / standard deviation of downside we then annualize this value by multiplying it by √12