Sortino Ratio

The Sortino Ratio is a variation of the Sharpe Ratio designed to address one of its main criticisms: the Sharpe Ratio treats upside and downside volatility identically, even though investors generally welcome large positive months and only worry about large negative ones.

Instead of dividing excess return by total standard deviation, the Sortino Ratio divides it by "downside deviation" — a measure that counts only the volatility of returns that fall below a minimum acceptable threshold, often zero or the risk-free rate. A strategy that has a few extremely strong up months and otherwise steady, small losses will look worse under the Sharpe Ratio than under the Sortino Ratio, because the Sharpe Ratio penalizes that upside volatility as if it were a negative.

Because of this, the Sortino Ratio is often considered a more intuitive measure of risk-adjusted return from an investor's actual point of view: it cares only about the volatility you experience as a loss, not the volatility that comes from unusually good months. A portfolio with a Sortino Ratio much higher than its Sharpe Ratio is telling you that most of its volatility has historically come from the upside.

The Sortino Ratio shares the Sharpe Ratio's dependence on the chosen risk-free rate and the measurement period, so it is best read as one input among several. On this site it appears alongside the Sharpe Ratio, volatility, and max drawdown for every strategy, so you can see both how efficient a strategy was and how painful its worst stretch became.