Sortino Ratio
Like Sharpe, but the denominator uses only downside deviation (volatility of returns below the risk-free rate), not total volatility. Penalizes losses but not upside swings.
When to use: Use when upside volatility shouldn't count as risk — e.g. for asymmetric strategies (long-options, momentum) where high upside variance is the goal. Sortino is the more honest measure for any strategy where you welcome positive surprises.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| Sortino | Sortino Ratio | Excess return per unit of downside volatility | integer |
| Returns | Periodic Returns | Sequence of periodic returns as decimals (e.g. 0.05 for 5%) | % |
| Rf | Risk-Free Rate | Per-period risk-free rate as a decimal (use the same period as the returns) | % |
Real-Life Examples
Example 1: Mixed Returns
Returns: 10%, −5%, 8%, −3%, 12%, 4%. Rf = 3%.
Given
Step-by-Step
Sortino of 0.30 — modest. Compare against this portfolio's Sharpe ratio: a meaningful gap between Sharpe and Sortino indicates that some of the volatility is upside-favorable.
Frequently Asked Questions
Both are useful. Sharpe penalizes all volatility; Sortino penalizes only downside. For symmetric return distributions they often tell similar stories. For asymmetric strategies (option-buying, momentum, equity long-only) Sortino is more representative because the upside variance is the point.
Most commonly the risk-free rate (this calculator). Some practitioners use 0% (any negative return) or a minimum acceptable return (MAR) specific to their objective. The choice doesn't change the conceptual interpretation, only the magnitudes.
When the sample has zero or one observation below the threshold — the denominator collapses or becomes unstable. Use longer return histories (≥ 30 observations) for a stable Sortino.