What does the Sortino Ratio account for in its calculation?

The Sortino Ratio is a risk-adjusted performance measure that specifically accounts for downside risk. Unlike other ratios, such as the Sharpe Ratio, which uses total volatility (standard deviation) to assess risk, the Sortino Ratio focuses solely on downside deviation. This means it only considers negative asset returns that fall below a specified target or minimum acceptable return.

By concentrating on downside risk, the Sortino Ratio provides a clearer picture of a portfolio's performance in the context of minimizing losses and achieving positive returns. This is particularly useful for investors who prioritize avoiding losses over generating high returns, as it more accurately reflects the investment's risk profile and its ability to generate returns above a certain threshold.

In contrast, the other options address different aspects of risk or performance metrics that are not specifically focused on the downside aspect that the Sortino Ratio emphasizes. For example, portfolio standard deviation looks at total volatility, including upward movements, which is not aligned with the objective of limiting downside risk.