Glossary
Sortino Ratio
The Sortino Ratio is a financial metric that measures an investment’s return relative to its downside risk. Unlike the Sharpe Ratio, which considers both upside and downside volatility, the Sortino Ratio focuses only on harmful volatility—making it a more refined way to assess risk-adjusted performance.
How is the Sortino Ratio calculated?
Sortino Ratio = (Investment Return − Risk-Free Rate) ÷ Downside Deviation. It isolates negative volatility instead of total volatility.
Why use the Sortino Ratio instead of the Sharpe Ratio?
Because it only penalizes downside risk, the Sortino Ratio gives a clearer picture of whether returns are being achieved efficiently, without punishing upside swings.
What is a good Sortino Ratio?
A Sortino Ratio above 1 is generally considered good; higher values indicate better risk-adjusted performance relative to downside risk.
What is downside deviation?
It’s a measure of the volatility of negative returns—how far returns fall below a minimum acceptable threshold, typically the risk-free rate or a target return.
Who uses the Sortino Ratio?
Portfolio managers, analysts, and sophisticated investors use it to evaluate performance, especially when managing portfolios with asymmetric risk profiles or when upside volatility is not a concern.
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