Why it exists
The Sharpe ratio treats a big up day as risky as a big down day. Investors do not mind upside surprises. The Sortino ratio only counts the volatility of bad returns.
Formula
Sortino = (annual return - target return) / annual downside deviation
Downside deviation is like Standard deviation and volatility, but only returns below the target (often zero or the risk-free rate) are counted; returns above it count as zero.
Example
Two strategies both return 12% with 15% total volatility. Strategy A's swings are mostly upward, with 7% downside deviation; B's are mostly downward, with 12%. With a 4% target, A's Sortino is 8 / 7 = 1.14 and B's is 8 / 12 = 0.67, even though their Sharpe ratios are identical.
When to prefer it
Use Sortino for strategies whose returns are lopsided, such as trend-following or option-selling strategies. For a broad stock portfolio, Sharpe and Sortino usually rank strategies similarly, with Sortino values somewhat higher.
See also
- Sharpe ratio What the Sharpe ratio measures, how to calculate it from returns and volatility, what counts as a good Sharpe ratio, and where it misleads.
- Calmar ratio The Calmar ratio compares annual return with the worst drawdown. How to calculate it, what a good value is, and why drawdown-based risk matters.
- Standard deviation and volatility What volatility means in investing, how standard deviation of returns is calculated and annualised, and typical volatility for stocks, bonds and leveraged funds.
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Last updated September 30, 2026. Education only, not investment advice.