Sortino Ratio
Return above a minimum acceptable return per unit of downside deviation only.
Formula
Sortino Ratio = (Portfolio Return - Target Return) / Downside Deviation
Unit
ratio (x, times)
In depth
The Sortino ratio fixes the Sharpe ratio's main defect by counting only deviations below a target, on the reasonable ground that investors do not regard upside surprises as risk. It therefore rates strategies with asymmetric return profiles more favourably, which is usually the fairer treatment. Because the target return is chosen by the analyst — zero, the risk-free rate, or a required return — Sortino ratios from different sources are not directly comparable unless the target is stated. It shares the Sharpe ratio's dependence on the period examined and on the return distribution being reasonably stable.
Worked example
A portfolio returning 14% against a 7% target with downside deviation of 8% has a Sortino ratio of (14 - 7) / 8 = 0.875, against a Sharpe of 0.58 on total volatility of 12%. The gap says most of the variation was upside.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Sortino Ratio” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.