Calculate Sortino Ratio - Quant Researcher Interview Question
Difficulty: Medium
Category: backtesting
Asked at: Point72, Citadel, AQR Capital Management, WorldQuant, Millennium
Topics: risk-metrics, statistics, numpy
Problem Description
The Sortino Ratio improves upon the Sharpe Ratio by penalizing only downside volatility, offering a more accurate risk-adjusted performance measure for return distributions that are not normally distributed. By focusing exclusively on returns falling below a specific target, it helps investors distinguish between harmful volatility and general price fluctuations.
Task
Implement a function solution(returns, target_return) that calculates the Sortino Ratio given a list of historical returns and a
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