Sortino Ratio

What is Sortino Ratio?

The Sortino ratio improves on the Sharpe ratio by penalising only the downside standard deviation (returns that fall below the minimum acceptable return, typically the risk-free rate), rather than total standard deviation. This distinction matters for investments with positively skewed returns: a fund that achieves many small gains and rare large losses should not be penalised for the upside variability. The denominator — downside deviation — is computed as the standard deviation of returns below the target rate only, treating all returns above the target as zero deviations. A higher Sortino ratio indicates better risk-adjusted performance on a downside-only basis. It is most useful for hedge funds and strategies where return distributions are not symmetric.