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