What are the advantages and limitations of using the Sortino ratio in the context of cryptocurrency trading?

1 answers

• James KorecFeb 11, 2025 · 7 months ago
  The Sortino ratio is a commonly used metric in cryptocurrency trading to evaluate the risk-adjusted performance of investments. It focuses on downside risk, which is crucial in a highly volatile market like cryptocurrencies. By considering only the negative returns, it provides a more accurate measure of the risk investors are exposed to. However, one limitation of the Sortino ratio is that it does not take into account the magnitude of positive returns. This means that investments with high volatility and occasional large gains may still have a favorable Sortino ratio, even though the overall risk may be higher. Additionally, the Sortino ratio assumes a normal distribution of returns, which may not hold true for cryptocurrencies. Despite these limitations, the Sortino ratio can still be a valuable tool when used in combination with other metrics to assess the risk and performance of cryptocurrency investments.
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