Sortino ratio
Like the Sharpe ratio, but penalizes only downside volatility.
Volatility treats a sharp rise as harshly as a sharp fall. The Sortino ratio divides by downside deviation instead, so an investment is not marked down for surprising on the upside.
Formula
Sortino = (Return − Target) ÷ Downside deviation
Inputs
- Return. Average return, annualized.
- Target. The minimum acceptable return — zero or the risk-free rate.
- Downside deviation. The dispersion of returns below the target, annualized.
How to read it
Higher is better. A Sortino well above the Sharpe says much of the volatility was on the upside.
How to use it
Prefer it to the Sharpe ratio for strategies with asymmetric returns, such as trend following, whose upside volatility the Sharpe ratio penalizes.
Limitations
Needs enough losing days for the downside deviation to settle; a short or very profitable history makes it unstable.
In Kereon
Portfolio. Mean daily return above the risk-free rate ÷ the standard deviation of the losing days only (days below zero) × √252. Needs at least three losing days.
Strategies. Mean daily return above the 13-week Treasury bill ÷ downside deviation × √252, where downside deviation is the root mean square of every day's return above the bill, with gains counted as zero. Target: the bill.
Investing · price record. Same as a backtest's: mean daily return ÷ the root mean square of min(return, 0) over every day × √252, target 0 — over the whole history loaded, or the window the label names.
Also called: sortino, sortino ratio.