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Risk Metric
Sortino Ratio
Sortino Ratio
Definition
Similar to the Sharpe Ratio but only penalizes downside volatility. It uses downside deviation instead of standard deviation, making it more relevant for investors who are concerned about losses rather than overall volatility.
Formula
(Portfolio Return - Risk-Free Rate) / Downside Deviation
Good
> 2.0
Bad
< 1.0
Example
A Sortino of 2.5 means the portfolio generates 2.5 units of excess return for every unit of downside risk. Unlike Sharpe, Sortino doesn't penalize upside volatility.