Sortino ratio

Description

The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment’s risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment’s return-generating efficiency.

The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk.

Related formulas

Variables

SSortino ratio, expressed in percentages and therefore allows for rankings in the same way as standard deviation (dimensionless)
Rasset or portfolio average realized return (dimensionless)
Ttarget or required rate of return for the investment strategy under consideration (originally called the minimum acceptable return MAR) (dimensionless)
DRtarget semi-deviation (the square root of target semi-variance), termed downside deviation (dimensionless)