What is a portfolio statistic that accounts for downside standard deviation?

The Sortino Ratio is a portfolio statistic that specifically measures the risk-adjusted return while focusing only on downside volatility, which is a key distinction from other ratios such as the Sharpe Ratio. The Sortino Ratio considers only the standard deviation of negative returns, thereby providing a clearer picture of the downside risk that an investor may face.

This emphasis on downside deviation allows investors to assess how well a portfolio is performing relative to the level of risk that is particularly concerning to them—i.e., the risk of losses rather than overall volatility. By differentiating between harmful volatility (downside risk) and beneficial volatility (upside potential), the Sortino Ratio gives a more nuanced understanding of risk-adjusted performance.

In contrast, the Sharpe Ratio includes all volatility, regardless of whether returns are positive or negative, which can obscure a true assessment of risk for risk-averse investors. The Treynor Ratio measures returns relative to systematic risk but does not focus on downside risk specifically. The Beta Ratio quantifies the sensitivity of a portfolio's returns to market movements, which does not account for standard deviation at all.

Thus, the Sortino Ratio is the correct choice for understanding performance in the context of downside risk.