Sortino Ratio
A risk-adjusted return metric similar to the Sharpe Ratio, but measuring volatility using only downside price moves, rather than penalizing upside volatility as well.
The Sortino Ratio measures risk-adjusted return by dividing an investment's excess return (above a risk-free or minimum acceptable return) by its downside deviation — a measure of volatility that counts only negative price swings, ignoring positive ones entirely. This distinguishes it from the Sharpe Ratio (see Kaavon's "Sharpe Ratio" glossary definition), which uses standard deviation across both upside and downside moves, treating a sharp, favorable price spike the same as an equally sharp, unfavorable drop when calculating volatility.
Proponents argue the Sortino Ratio gives a more intuitively accurate picture of genuine investment risk, since most investors don't consider strong upside volatility a bad thing worth penalizing, only downside volatility that actually threatens their capital. An asset with a meaningfully higher Sortino Ratio than Sharpe Ratio typically has an asymmetric return profile skewed toward large positive moves with comparatively smaller, more contained downside moves, which the Sharpe Ratio's symmetric treatment of volatility doesn't fully capture.
Examples
- An asset with large, favorable price spikes but comparatively contained downside moves would show a meaningfully higher Sortino Ratio than Sharpe Ratio, since the Sortino Ratio doesn't penalize the upside volatility at all.
- The Sortino Ratio is generally considered a more intuitive risk-adjusted return measure than the Sharpe Ratio for investors who only consider downside volatility a genuine risk worth penalizing.