Sortino Ratio
-
Excess Return
-
Rating
-
When Should You Use This?
Use the Sortino Ratio when you want a more accurate picture of risk-adjusted returns. Unlike the Sharpe Ratio, Sortino only penalizes downside volatility — upside volatility (big wins) is rewarded, not punished.
How It Works
1
Enter Returns
Input your annualized portfolio return and the current risk-free rate.
2
Enter Downside Deviation
Input the downside deviation (standard deviation of negative returns only). Your broker or portfolio analytics tool can calculate this.
3
Compare
A Sortino above 2 is very good. Compare to your Sharpe Ratio — if Sortino is much higher, your strategy has healthy upside volatility.
Frequently Asked Questions
The Sortino Ratio is like the Sharpe Ratio but uses downside deviation instead of total standard deviation. It only penalizes bad volatility (losses), not good volatility (gains).
Sharpe treats all volatility as bad. Sortino recognizes that upside volatility (your portfolio surging 5% in a day) is desirable. This makes Sortino more useful for asymmetric strategies.
Downside deviation measures the volatility of returns below your target (usually the risk-free rate). It ignores all positive returns and only measures the spread of losses.
Below 1 is poor, 1-2 is good, 2-3 is very good, above 3 is excellent. Sortino ratios are typically higher than Sharpe ratios for the same portfolio.
Use Sortino when comparing strategies with different return profiles, especially options strategies, trend-following, or any approach where big wins are expected and desirable.