Sortino Ratio
In short
Like Sharpe but only penalizes downside volatility — more nuanced risk metric
Sharpe ratio penalizes all volatility, even upside gains. Sortino only penalizes bad volatility (downside). A fund that has big gains but small losses looks better on Sortino than Sharpe.
Sortino ratio replaces total standard deviation with downside deviation (only negative returns). It gives a more accurate picture for asymmetric return distributions. Preferred over Sharpe when upside volatility is not a concern.
Formula
Sortino = (Rp - Rf) ÷ Downside DeviationThresholds
- <0
- Negative risk-adjusted return
- 0-1
- Below average
- 1-2
- Good
- >2
- Excellent
Related concepts
- Sharpe Ratio — Sharpe ratio measures how much return you get for every unit of risk you take. A Sharpe of 1.0 means for every 1% of risk, you earn 1% return above the risk-free rate. Higher is better.
- Calmar Ratio — Calmar asks how much return you earned per dollar of maximum pain. If a portfolio returned 15% annually over the period measured but suffered a 30% drop from peak to trough at its worst point, the Calmar ratio is 0.5 — half a percent of return for every percent of that worst loss.
- Downside Deviation — Unlike regular volatility, which counts every swing up or down, downside deviation only measures the bad ones. A fund that swings wildly on good days but rarely loses money will show high standard deviation but low downside deviation — it isolates the risk of actually losing money.