Knowledge BaseRisk & quality scores › Sortino Ratio
Risk & quality scores

Sortino Ratio

A risk-adjusted return measure like the Sharpe ratio, but it penalizes only downside volatility instead of total volatility.

Part of the Financial Health & Risk course · Lesson 13 of 20
Formula
(Rp − MAR) ÷ σd , σd = √[ (1÷N) Σ min(Ri − MAR, 0)² ]
Return − risk-freeexcess return÷Downside deviationbad volatility only=Sortinodownside-adjusted
The Sortino ratio is like Sharpe but penalizes only downside (harmful) volatility.

What it is

The Sortino Ratio, developed by Frank Sortino, measures how much return an investment earns above a target for each unit of harmful (downside) risk it takes. It takes the return above a minimum acceptable return (MAR), often the risk-free rate or simply zero, and divides it by downside deviation, which counts only the volatility of returns that fell below that target. Returns above the target are treated as good and contribute nothing to the denominator. It is a refinement of the Sharpe ratio for investors who do not view upside swings as risk.

Why it matters

Because it ignores upside swings, the Sortino ratio gives a fairer read on strategies with lumpy or skewed returns, where big up moves would unfairly inflate the Sharpe ratio's denominator. The main pitfall is a noisy denominator: if an investment had few periods below the target, downside deviation is estimated from a handful of observations and a single outlier can swing the ratio wildly, so a sky-high Sortino on a short, calm track record can be a mirage rather than skill.

How it's calculated

Subtract the minimum acceptable return (commonly the risk-free rate or zero) from the investment's return to get excess return, then divide by downside deviation. Downside deviation is found by taking each period's shortfall below the target, squaring it (counting above-target periods as zero), averaging those squared shortfalls over all periods, and taking the square root. Both numerator and denominator should cover the same period and frequency before comparing names.

How Quintarthai uses it

Risk-adjusted and volatility metrics surface on a company's deep-analysis page at /app/, where you can study a name's downside-risk profile alongside click-to-source receipts. Learn the related building blocks in the Knowledge Base.

Cross-border note. When the target is the risk-free rate, match it to the holding's currency: US 3-month Treasury bills for USD returns and Government of Canada T-bills for CAD, otherwise a currency mismatch distorts the excess-return numerator for dual-listed or cross-border portfolios.

FAQ

How is the Sortino ratio different from the Sharpe ratio?
Both divide excess return by a risk measure, but Sharpe uses total standard deviation (penalizing up and down swings equally) while Sortino uses downside deviation, counting only returns below the target. Sortino tends to look better for strategies with big upside moves.
What target return should I use?
Common choices are the risk-free rate, zero, or a personal hurdle like inflation. There is no single standard, so always check which target a published Sortino figure used, because changing it changes the result and breaks comparability.
Check your understanding
Two funds have nearly identical Sharpe ratios, but Fund A had several sharp drops below its target return while Fund B's volatility came almost entirely from large upside surges. Which fund will tend to show the higher Sortino ratio, and why?
Related terms
See Sortino Ratio on a real company
Open any stock in Quintarthai and explore it live across the screener and company pages.
Open the app →