Sortino Ratio
The Sortino Ratio is a variation of Sharpe Ratio using only downside deviation instead of total volatility: (Return - Target) / Downside Deviation.
Concept map
Learn, apply, review
Definition
The Sortino Ratio is a variation of Sharpe Ratio using only downside deviation instead of total volatility: (Return - Target) / Downside Deviation.
Use case
Used in risk management workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Sortino Ratio
Unlike Sharpe, which penalizes upside volatility equally with downside, Sortino focuses on harmful volatility. It uses a minimum acceptable return (MAR) — often risk-free rate or zero — and calculates deviation only for returns below this threshold. More appropriate for asymmetric return distributions.
Example: Portfolio returns 12% with 15% total volatility, but only 8% downside deviation below target of 5%. Sharpe = (12% - 5%) / 15% = 0.47. Sortino = (12% - 5%) / 8% = 0.875. Sortino presents more favorable risk-adjusted picture by ignoring upside volatility.