What is the Sortino ratio
The Sortino ratio measures how much return a strategy or fund earned for each unit of downside volatility, meaning only the swings below a chosen target return.
It is a risk-adjusted return measure, like the Sharpe ratio. The difference is that it does not count upside swings as risk.
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Sortino ratio formula
Sortino = (R − T) / DD
- R is the average return over the period you measure, such as the average monthly return.
- T is the target or minimum acceptable return. Common choices are no return at all or a risk-free rate. For a PKR-based investor, one reference is the SBP policy rate. The latest decision is SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC).
- DD is the downside deviation:
- Take each period's return and subtract T.
- Keep only the shortfalls, where the return was below T. Count every other period as no shortfall.
- Square each shortfall.
- Average the squared shortfalls across all periods.
- Take the square root of that average.
To annualise a monthly figure, multiply it by the square root of the number of periods in a year. Annualising works the same way as for annualized volatility.
Worked example (hypothetical)
Take two strategies with the same average monthly return and the same total volatility, measured against the same target.
- Strategy A: most of its swings come from unusually strong months. Its losing months are small.
- Strategy B: most of its swings come from sharp losing months. Its good months are modest.
Both strategies have the same Sharpe ratio because standard deviation treats up and down moves the same way.
The Sortino ratios are different:
- Strategy A has small shortfalls below the target. Its downside deviation is low, so its Sortino ratio is high.
- Strategy B has large shortfalls below the target. Its downside deviation is high, so its Sortino ratio is lower.
To try the arithmetic with your own figures, use a spreadsheet or the tools on the calculators page.
Sharpe vs Sortino
| Sharpe ratio | Sortino ratio | |
|---|---|---|
| Risk measure | Standard deviation of all returns | Downside deviation below a target |
| Treats upside swings as risk | Yes | No |
| Benchmark in the numerator | Risk-free rate | Target return (often the risk-free rate) |
| Most useful for | Return patterns that are roughly symmetric | Skewed returns, such as option selling or trend following |
Where you see it
- Fund factsheets and portfolio reports, often next to alpha, beta and CAGR.
- Backtest and strategy reports from analytics software and some trading platforms. MT4 and MT5 testers mainly report other statistics, so check what your report actually shows.
- Copy-trading and strategy-ranking pages, where it is used to compare track records.
Edge cases experienced readers should check
- No losing periods: if no period falls below the target, the downside deviation is nil and the ratio has no meaning. A short sample can produce this.
- Denominator convention: some sources average squared shortfalls over all periods, others only over the losing periods. The results are not comparable.
- Choice of target: changing T changes both the numerator and the denominator. Always state which target was used.
- Fat tails: a calm history can hide rare, large losses. See fat tails and tail risk.
- Leverage: the ratio can look similar at different leverage levels while the losses in money are much larger. Leveraged CFD and forex trading can lose money fast. A past Sortino ratio does not predict future results.
- Frequency: daily and monthly figures differ. Compare ratios only when they use the same frequency and the same annualisation method.
Related terms: annualized return, equity curve, correlation coefficient, risk management.
Frequent questions
What is a good Sortino ratio?
There is no universal threshold. Compare ratios only across strategies that use the same period, frequency, target and formula convention.
Is Sortino better than Sharpe?
Neither is better in general. Sortino is more informative when returns are skewed. Sharpe is simpler and more widely reported.
Can the Sortino ratio be negative?
Yes. It is negative when the average return is below the target.
Does a high Sortino ratio mean low risk?
No. It summarises past downside swings only. It does not capture rare events that were missing from the sample, and it does not show how large a drawdown was in money.