What Is Sortino Ratio?
The Sortino ratio measures risk-adjusted return using only downside deviation (bad volatility), so it does not penalize upside volatility.
Quick Answer
The Sortino ratio measures risk-adjusted return using only downside deviation (bad volatility), so it does not penalize upside volatility.
What Does Sortino Ratio Measure?
The Sortino ratio was developed by Frank A. Sortino as an alternative to the Sharpe ratio. Unlike Sharpe, it uses downside deviation—volatility of returns below a target or minimum acceptable return (often 0 or the risk-free rate). This makes it preferred by many traders and portfolio managers who care more about downside risk than total volatility. A higher Sortino ratio means better return per unit of downside risk.
Sortino Ratio = (Rp - Rf) / σd where σd = downside deviation (standard deviation of returns below target)Typical range: Often 1.0–3.0+ when annualized; depends on strategy
How to Interpret Sortino Ratio
- 1Sortino is typically higher than Sharpe for strategies with positive skew
- 2Focuses on “bad” volatility only, so more relevant for risk-averse investors
- 3Use same target (e.g. 0% or risk-free rate) when comparing strategies
- 4No standard “good” threshold; compare relative to other strategies
How to Use Sortino Ratio in Backtesting & Portfolio Analysis
Common Mistakes to Avoid
Backtest with Sortino Ratio in VaultCharts
VaultCharts includes backtesting with built-in and custom strategies. Analyze Sortino Ratio, Sharpe ratio, max drawdown, and more—all with your data stored locally.