Sortino Ratio

The Sortino ratio is a risk-adjusted performance measure that divides a strategy's excess return by its downside deviation — the volatility of negative returns only — rather than by total volatility. It refines the Sharpe ratio's core idea by dropping upside swings from the penalty term, on the argument that investors are not troubled by volatility that works in their favour. The measure is named after Frank Sortino, whose research centred on downside risk. A higher Sortino ratio indicates more return earned per unit of harmful volatility, and comparing it with the same strategy's Sharpe ratio shows how much of the total variability came from gains rather than losses. Traders apply it when evaluating backtests, funds or signal providers whose return profiles are asymmetric, where standard deviation alone can make a strategy look worse than its loss history warrants.