Sortino Ratio
The Sortino ratio is like the Sharpe ratio but counts only downside volatility, so large gains are not penalised as risk.
The Sharpe ratio treats every swing as risk, including big gains. Most traders do not mind upside surprises; what they fear is losses. The Sortino ratio fixes that by dividing excess return only by downside deviation — the volatility of returns below a target. It gives a fairer picture of strategies with large, occasional winners, such as trend following, and a harsher one of strategies with frequent losses. This entry explains the calculation and when to use it.
- Reading time
- 4 min
- Also called
- Sortino, Downside deviation, Downside risk-adjusted return
- Updated
The Sortino ratio in plain words
Take the return above a target (often the risk-free rate or zero), and divide it by how much the returns fall below that target on average — ignoring periods that beat it.1
Two strategies with the same Sharpe ratio can have very different Sortino ratios: the one whose volatility comes mostly from big gains scores higher.2 See Sharpe Ratio.
How to calculate the Sortino ratio, step by step
Choose a target return
Commonly zero or the risk-free rate per period.
Compute excess returns
Each period’s return minus the target.
Keep only shortfalls
Set positive excess returns to zero; keep negative ones.
Downside deviation
Square the shortfalls, average them over all periods, take the square root.
Divide
Sortino = average excess return ÷ downside deviation.
Annualise
Multiply by √(periods per year), as with the Sharpe ratio.
Worked examples
Example 1 — Five months of returns
CalculationMonthly returns: +6%, −2%, +4%, −4%, +1%. Target 0%.
| Average return | +1.0% a month |
| Shortfalls squared | 0, 4, 0, 16, 0 → average 4 |
| Downside deviation | √4 = 2% |
| Monthly Sortino | 1.0 ÷ 2 = 0.5 |
Only the two losing months count as risk; the big +6% month does not.
Example 2 — Same Sharpe, different Sortino
ComparisonTwo strategies each return 12% with 10% volatility. Strategy A’s volatility comes mostly from large gains; B’s from frequent losses.
| Sharpe ratios | Equal |
| Sortino ratios | A much higher than B |
Sortino separates “good” volatility from “bad” volatility.
Example 3 — The limit of downside measures
Tail riskA strategy shows a high Sortino ratio over two years with only small, rare losses — until one month brings a −35% loss.
| Before | High Sortino |
| After the loss | Ratio collapses |
No ratio can measure risks that have not yet appeared in the data. Always check worst cases and drawdowns. See Drawdown.
Sortino vs. Sharpe
| Aspect | Sortino | Sharpe |
|---|---|---|
| Risk measure | Downside deviation only | Total volatility |
| Penalises big gains? | No | Yes |
| Better for | Skewed strategies with big winners | Roughly symmetric returns |
| Depends on | Chosen target return | Risk-free rate |
When the Sortino ratio is useful
Trend-following evaluation
Strategies with rare large wins look fairer. See Trend Following.
Comparing funds
Highlights managers whose volatility comes from losses.
Backtest reports
A standard companion to the Sharpe ratio. See Backtesting.
Personal goals
Using your own target return as the threshold.
Advantages and disadvantages
Advantages
- Focuses on the risk traders actually fear: losses.
- Fairer to strategies with large upside swings.
- Uses the same familiar structure as the Sharpe ratio.
Disadvantages
- Depends on the chosen target return.
- Few losing periods make it unstable.
- Still blind to risks not present in the sample.
- Less standardised than the Sharpe ratio.
Going deeper
Read as far as you need. Each level builds on the one before it.
Higher is better
Beginner
Like the Sharpe ratio, a higher Sortino ratio means more return per unit of (downside) risk.
Use all periods in the average
Intermediate
Downside deviation averages squared shortfalls over all periods, counting gains as zero shortfall — not just over the losing periods. Using only losing periods overstates downside risk.
Pair it with drawdown
Advanced
Sortino measures typical downside variability, not the depth of the worst decline. The Calmar ratio, using maximum drawdown, complements it. See Calmar Ratio.
Common mistakes
Comparing ratios with different targets
Use the same target return.
Tiny samples
A few losing months make the ratio unreliable.
Ignoring drawdowns
Check the worst decline separately.
Mixing frequencies
Annualise before comparing.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Sortino = excess return ÷ downside deviation.
- Only returns below the target count as risk.
- Fairer than Sharpe for strategies with large winners.
- Depends on the chosen target and sample size.
- Use alongside drawdown measures.
Frequently asked questions
What is a good Sortino ratio?
Is Sortino better than Sharpe?
What target return should I use?
Further learning
- Sharpe Ratio
The more common measure Sortino adjusts.
- Drawdown
The worst-case view Sortino does not show.
- Backtesting
Where these ratios are reported.
- Volatility
The broader concept of price variability.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Charles Schwab. Using the Sortino Ratio to Gauge Downside Risk (opens in a new tab) Checked .
- William F. Sharpe, Stanford University. The Sharpe Ratio (Journal of Portfolio Management, 1994) (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Sortino Ratio (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.