What Is Sortino Ratio?
The Sortino Ratio is a variant of the Sharpe Ratio that uses only downside deviation in the denominator instead of total standard deviation. The reasoning: traders don't actually mind upside volatility — only downside hurts.
Formula: (return - risk-free rate) / downside deviation. A strategy with the same return as another but smaller drawdowns will have a higher Sortino. This makes Sortino better for strategies with positive skew — like trend-following — where occasional big wins drive total return.
Sortino > Sharpe for the same strategy when returns are right-skewed. Sortino < Sharpe is rare in actively-managed strategies because most have left-skewed return profiles (occasional big losses). Looking at both ratios together gives a more complete picture of risk-adjusted performance.
Related terms
- Sharpe Ratio — Risk-adjusted return — the excess return per unit of volatility.
- Drawdown — The peak-to-trough decline in account equity during a losing streak.
- Expectancy — The average profit or loss per trade, given win rate and average win/loss size.
- Volatility — A statistical measure of how much an asset's price varies over a period.