Sortino Ratio

The Sortino ratio is like Sharpe but only penalises downside volatility, not upside.

A real-world scenario

A covered-call fund and a stock index fund post the same 10% return and similar total volatility. The index fund gets there with 25% swings in both directions; the covered-call fund caps its downside with options and grinds upward instead. Their Sharpe ratios are nearly identical, but the Sortino ratio favours the covered-call fund, whose harmful downside volatility is smaller. For an investor who loses sleep over drops, Sortino describes the actual experience far better than Sharpe.

Why it matters

It scores risk more sensibly — investors fear drops, not gains.

Common confusion

It needs a target return to define “downside,” a small extra input.

Worked example

How investors use it

Compare funds with Sortino when their volatility profiles differ and you care about the shape of the ride. The caveat is that downside deviation definitions vary, so compare like for like.

Key takeaway

The Sortino ratio is Sharpe with a better sense of what hurts: it penalises only downside volatility, not the upside swings that make portfolios fun. Two funds with identical Sharpe ratios can have very different Sortino scores, because one suffers the drops and the other dodges them. Use it when you care about the shape of the ride, and compare like for like since downside definitions vary. Investors fear losses more than missed gains — the Sortino agrees with them. For income-oriented strategies like covered calls, it is often the more honest scorecard.

Definitions reviewed by the Investing Glossary editorial team.