Performance also: Sortino

Sortino ratio

A risk-adjusted return metric similar to Sharpe but dividing by downside deviation only, ignoring upside volatility. Better suited to asymmetric return distributions.

Why it exists

The Sharpe ratio treats upside volatility as risk, which is mathematically convenient but economically wrong. A month where you earn 8% instead of the usual 2% is not risky from an investor perspective. Sortino fixes this by computing standard deviation on negative returns only.

Interpretation

Sortino is always higher than Sharpe for strategies with any positive skew. A Sortino of 2.5 alongside a Sharpe of 1.8 suggests the strategy has some large winning months — a desirable asymmetry.

Rule of thumb: if Sortino is much higher than Sharpe, the strategy has positive skew (good). If they are nearly equal, the return distribution is roughly symmetric.

Related terms

See also