Performance Metric

Sortino Ratio — Definition & Example

Risk-adjusted return — like Sharpe, but penalising only downside volatility.

Sortino ratio refines Sharpe by recognising that traders don't fear upside volatility. It uses downside deviation (standard deviation of negative returns only) in the denominator, so a strategy with consistent winners and occasional big winners isn't penalised. Generally considered more relevant for trading evaluation than Sharpe for this reason. Values above 1.5 are considered strong.

Formula

Sortino Ratio = (Rp − Rf) / σd, where σd = standard deviation of negative returns only

Example

Strategy returns 20% annually. Risk-free rate is 5%. Downside deviation is 8%. Sortino = (20 − 5) / 8 = 1.875. Stronger than its Sharpe would be if upside volatility were also high.

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Sortino Ratio — Definition & Example

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