Cognitive Scaffold

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MENTAL MODEL · M3157

Sortino Ratio

Sortino Ratio
BusinessHigh supportFinance
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Version 1.0.0 · Updated 2026-07-31

CORE DEFINITION

An improved version of the Sharpe ratio. It distinguishes between "good volatility" (upside) and "bad volatility" (downside). It uses only downside standard deviation to measure risk, because investors typically do not mind volatility from gains.

SCAFFOLDING EFFECT

psychology

Reduce cognitive load

Asymmetric risk perspective. It corrects the one-sided view that "volatility equals risk." When evaluating projects or investments, focus on "how much you might lose" rather than simply looking at "how much it changes."

anchor

Anchor fast decisions

Sortino Ratio = (Portfolio return − Risk-free rate) / Downside deviation. Unlike Sharpe, it only penalizes downside volatility (deviations below the target return) and ignores upside volatility, aligning better with investors' asymmetric risk perspective of "only hating losses."

MINIMUM ACTION

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Sortino_ratioZH · Explicit
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