Sortino Ratio
Sortino ratio = (R_p − R_f) / σ_d, where σ_d is the downside deviation: the standard deviation computed over only the returns that fall below a target (usually zero or the risk-free rate). The numerator is identical to Sharpe; the denominator drops upside volatility entirely.
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Definition
Sortino ratio
Sortino ratio = (R_p − R_f) / σ_d, where σ_d is the downside deviation: the standard deviation computed over only the returns that fall below a target (usually zero or the risk-free rate). The numerator is identical to Sharpe; the denominator drops upside volatility entirely.
Why it matters
Sortino is the right number when payoff is asymmetric — long-volatility strategies, options-based hedges, momentum systems with positive skew. Comparing those to mean-reversion strategies on Sharpe alone is misleading because mean-reversion is naturally low-volatility on the upside.
How it works
Pick a target return (zero, risk-free rate, or a benchmark). For each period, compute max(0, target − return)². Average these, take the square root — that's downside deviation. Divide excess return by it. Annualize the same way as Sharpe.
Example
Trend-following CTA, 5 years
Annualized return
12%
Annualized full vol σ
18%
Annualized downside vol σ_d
11%
Sharpe
(12 − 2) / 18 = 0.56
Sortino
(12 − 2) / 11 = 0.91
Same return, same risk-free rate. Sharpe says mediocre, Sortino says respectable — the difference is the upside vol that Sharpe over-counts.
Key Takeaways
Sortino > Sharpe whenever the strategy has positively skewed returns.
Choice of target return matters — zero, risk-free, or benchmark all give different ratios.
Sortino doesn't fix tail risk: a strategy with rare catastrophic losses can still have an inflated Sortino on a short sample.
Related Terms
Try These Tools
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Sharpe vs Sortino Calculator
Paste daily returns; get Sharpe, Sortino, Calmar, and Omega side-by-side with a recommendation on which ratio fits your distribution.
Risk-Adjusted Returns Calculator
Paste a returns CSV. Sharpe, Sortino, Calmar, Omega, alpha, beta, tracking error, information ratio, max drawdown, and tail moments — plus.
FAQ
Questions people ask next
The short answers readers usually want after the first pass.
Sources & References
- Performance Measurement in a Downside Risk Framework — Sortino, Price (1994), Journal of Investing 3(3)
Related Content
Keep the topic connected
Sharpe Ratio
Sharpe ratio defined, when it lies (skew, fat tails, autocorrelation), and how to read a Sharpe number you didn't compute yourself.
Sharpe vs Sortino
Sharpe vs Sortino: when the gap between the two tells you something real about a strategy's tail behaviour — and when it's just noise from a small sample.