Glossary › Sortino Ratio
Sortino Ratio
Like Sharpe, but only the downside volatility counts as risk.
Formula
Sortino = (annualised return − risk-free rate) / annualised standard deviation of NEGATIVE returns
Intuition
Sortino fixes Sharpe's blind spot: it doesn't penalise a fund for having upside surprises. Only days when the fund lost money contribute to the 'risk' denominator. Higher = more upside per unit of actual pain.
What to look for
Sortino is almost always higher than Sharpe (most return distributions have more upside than downside variability). A Sortino meaningfully higher than the same fund's Sharpe means most of its volatility is to the upside.
Caveats
Sortino can be unstable when there are very few losing days in the window. It's most useful alongside Sharpe, not as a replacement.