Glossary
Sortino Ratio
Risk-adjusted return measured against downside deviation only — penalizes losses while ignoring upside volatility. Often more honest than Sharpe for asymmetric strategies.
Sentivue Capital··4 min read
The Sortino ratio is a Sharpe variant that measures excess return per unit of downside deviation rather than total volatility. It corrects the largest conceptual flaw in Sharpe: treating upside variability as risk.
Formula
Sortino = (R_p − T) / σ_d
- R_p — strategy return
- T — target return (often 0 or the risk-free rate)
- σ_d — downside deviation, computed only over returns that fell below T
When Sortino beats Sharpe
- Trend-following. Big upside outliers depress Sharpe. Sortino keeps them out of the denominator.
- Options selling. Mostly small wins with rare large losses — Sharpe can look fine until a tail event lands. Sortino isn't immune but is less misleading.
- Path-dependent strategies where the distribution of returns is materially skewed.
When Sortino misleads
- Symmetric distributions. Sortino and Sharpe converge; Sortino just adds calculation overhead with no signal gain.
- Sparse downside samples. If only 30 of 500 daily returns are negative, σ_d is unstable. Use a longer sample or fall back to Sharpe.
Common traps
- Inconsistent target (T). Comparing strategies fairly requires using the same target return. Switching between 0 and the risk-free rate changes the ranking.
- Annualization. Same √252 rule as Sharpe, but applied to σ_d.
- Confusing with Calmar. Sortino uses downside deviation; Calmar uses maximum drawdown. Different shapes of the same idea.