Sortino Ratio Calculation System Development
Sortino Ratio is an improved version of Sharpe Ratio, accounting only for downside volatility (downside deviation), ignoring "risk" from positive returns.
Formula: Sortino = (Rp − MAR) / DD
where MAR is Minimum Acceptable Return, DD is downside deviation.
Downside Deviation calculated only from negative deviations from MAR. This approach is especially useful for crypto strategies with asymmetric return distribution.
When Sortino is better than Sharpe: strategies with asymmetric return distribution (e.g., options strategies, strategies with large winners and small losers). Sortino doesn't penalize high right-side skewness.
System includes Sortino and Omega Ratio calculation, rolling window analysis, comparison with Sharpe and visualization in trading dashboard.