Which approach is the most appropriate for high-volatility portfolios?

A. Sharpe Ratio
B. Sortino Ratio
C. MAR

Correct Answer: B

Since the Sortino ratio does not use the standard deviation (which takes both upward and downward volatility into consideration) as the Sharpe ratio does, the Sortino ratio adjusts the performance for risk by only using the downside risk/deviation. The higher the Sortino ratio, the higher the portfolio return will be over the target rate of return. Therefore, the Sortino ratio is especially helpful when investors are analyzing asset classes and portfolios that are highly volatile, since the ratio focuses on whether returns are negative or below a certain threshold.