Performance & Risk Metrics
Sortino Ratio
A risk-adjusted performance metric that measures excess return per unit of downside volatility, penalizing only negative deviations from a target return threshold.
The Sortino Ratio refines the Sharpe Ratio by separating harmful downside volatility from benign upside volatility. The Sharpe Ratio treats a sharp gain and a sharp loss as equal risk; the Sortino Ratio only counts returns that fall below a target. That makes it a better fit for strategies with asymmetric return distributions, where big up-moves should not be charged as risk.
One caveat: a Sortino Ratio can be inflated by a few isolated large gains, which makes the downside look smaller than the strategy's true risk. Read it alongside the Sharpe Ratio and the maximum drawdown rather than on its own.
Formula
- Rp
- Portfolio or strategy return
- Rf
- Target or risk-free return threshold
- σd
- Downside deviation, standard deviation of negative excess returns