What Is Sortino Ratio? A Better Risk Metric Than Sharpe
The Sortino Ratio is like the Sharpe ratio, but smarter. Instead of penalizing all volatility, it only penalizes downside volatility.
Why Sortino Over Sharpe?
The Sharpe ratio treats a +5% day and a -5% day as equally "risky" because both increase standard deviation. But as a trader, you don't mind upside volatility — you only care about the losses.
Sortino fixes this by only looking at negative returns when calculating risk.
The Formula
Sortino Ratio = (Strategy Return - Risk-Free Rate) / Downside Deviation
The only difference from Sharpe: the denominator uses downside deviation (standard deviation of only negative returns) instead of total standard deviation.
Example: Strategy earns 12%, risk-free rate is 4%, downside deviation is 8%.
Sortino = (12% - 4%) / 8% = 1.0
Compare to the same strategy's Sharpe of 0.53 (from our Sharpe ratio post). Same strategy, but Sortino gives a better score because it doesn't penalize the upside moves.
How to Read It
| Sortino Ratio | Interpretation |
|---|---|
| Below 0 | Losing money |
| 0–1.0 | Weak to average |
| 1.0–2.0 | Good |
| 2.0+ | Excellent |
Sortino values are typically higher than Sharpe for the same strategy, because you're dividing by a smaller number (downside-only deviation < total deviation).
When to Use Sortino
Sortino shines for strategies where returns are asymmetric — meaning big wins and small losses (or vice versa). Mean reversion strategies often fit this profile: frequent small wins with occasional larger losses. Sortino captures this more accurately than Sharpe.
Key Takeaway
Sortino ratio gives you a fairer read on risk-adjusted performance than Sharpe because it only counts the volatility that actually hurts you. If you're only going to look at one risk-adjusted metric, make it Sortino.