What is the Sortino ratio?

The Sortino ratio measures return per unit of downside risk. It works like the Sharpe ratio with one difference: instead of the total volatility, it divides by the volatility of the returns that fall below a target. Swings upward — which no investor minds — are not counted as risk.

The formula

\text{Sortino} = \frac{R_p - T}{\sigma_d}

where $R_p$ is the portfolio's annualized return, $T$ the target or minimum acceptable return (often zero or the risk-free rate), and $\sigma_d \text{the} \times \times \text{downside deviation}$ **:

\sigma_d = \sqrt{\frac{1}{n} \sum_{t=1}^{n} \min(r_t - T, 0)^2}

Only periods with a return below the target contribute; every other period counts as zero. Like volatility, the downside deviation is annualized with the square root of the number of periods in a year.

A simple illustration

Two portfolios have the same average return of 8% a year and the same volatility of 15%, so their Sharpe ratios are equal. But their swings differ:

Portfolio A's volatility comes mainly from sharp rises; its losing months are mild. Its downside deviation is 7%.
Portfolio B's volatility comes mainly from sharp falls. Its downside deviation is 12%.

With a target of 2%:

\text{Sortino}_A = \frac{8\% - 2\%}{7\%} \approx 0.86 \qquad \text{Sortino}_B = \frac{8\% - 2\%}{12\%} = 0.50

The Sharpe ratio sees two identical portfolios; the Sortino ratio shows that A's risk is much easier to live with.

How to read it

Higher is better, as with the Sharpe ratio. A Sortino ratio well above the Sharpe ratio means the portfolio's volatility leans upward.
Values are not comparable with Sharpe values. The downside deviation is usually smaller than the volatility, so Sortino ratios tend to be higher, and a good value is correspondingly higher too.
The target matters. Only compare Sortino ratios calculated with the same target return.

Limits

Fewer data points. Only the losing periods enter the downside deviation, so the estimate rests on less data and is noisier than volatility.
Definitions vary. Some calculations divide by the number of losing periods instead of all periods, which gives different results.
It still looks back. A portfolio that has not yet had its bad year can show an excellent Sortino ratio. Maximum drawdown and stress tests help fill that gap.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

What is my Sortino ratio?

Your Sortino ratio is 1,07.

It measures risk‑adjusted return using downside volatility (how much return you get per unit of downside risk). A Sortino above 1 is often considered acceptable, above 2 is good, and above 3 is excellent.

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