Sortino ratio
InvestingDefinition
A risk-adjusted return measure similar to the Sharpe ratio, but it only penalizes DOWNSIDE volatility. Investors do not mind when investments jump upward sharply. What hurts is the drops. The Sortino ratio captures this by dividing your excess return by the standard deviation of only the negative returns.
Higher Sortino is better. A Sortino above 1 is good. Above 2 is excellent. Use it alongside Sharpe when comparing strategies with skewed returns (lots of small wins and rare big losses, or vice versa).
Higher Sortino is better. A Sortino above 1 is good. Above 2 is excellent. Use it alongside Sharpe when comparing strategies with skewed returns (lots of small wins and rare big losses, or vice versa).
Formula
Sortino = (Portfolio return minus risk-free rate) divided by Downside deviation
Example
Two portfolios have a 12% return and an 8% standard deviation, giving them the same Sharpe ratio. But Portfolio A's 8% is evenly split between good and bad surprises. Portfolio B's 8% is almost all upside volatility. Portfolio B has the much higher Sortino ratio.