What is the 'Sortino Ratio'
A modification of the Sharpe ratio that differentiates harmful volatility from general volatility by taking into account the standard deviation of negative asset returns, called downside deviation. The Sortino ratio subtracts the riskfree rate of return from the portfolioâ€™s return, and then divides that by the downside deviation. A large Sortino ratio indicates there is a low probability of a large loss. It is calculated as follows:
Â
Â
Â
Â
BREAKING DOWN 'Sortino Ratio'
The formula does not penalize a portfolio manager for volatility, and instead focuses on whether returns are negative or below a certain threshold. The mean in the Sortino ratio formula represents the returns a portfolio manager is able to get above the return that an investor expects.
Determining whether to use the Sharpe ratio or Sortino ratio depends on whether the investor wants to focus on standard deviation or downside deviation. Sharpe ratios are better at analyzing portfolios that have low volatility because the Sortino ratio wonâ€™t have enough data points to calculate downside deviation. This makes the Sortino ratio better when analyzing highly volatile portfolios.
While using the risk free rate of return is common, investors can also use expected return in calculations. In order to keep the formulas accurate, however, the investor should be consistent in what return type is used.
The ratio was named after Frank A. Sortino.
For an indepth knowledge of this ratio, read Mitigating Downside With The Sortino Ratio and 5 Ways To Rate Your Portfolio Manager.

Downside Deviation
A measure of downside risk that focuses on returns that fall ... 
Sharpe Ratio
The Sharpe Ratio is a measure for calculating riskadjusted return, ... 
Sterling Ratio
A ratio used mainly in the context of hedge funds. This riskreward ... 
Standard Deviation
1. A measure of the dispersion of a set of data from its mean. ... 
Current Ratio
The current ratio is a liquidity ratio measuring a company's ... 
Residual Standard Deviation
A statistical term used to describe the standard deviation of ...

Investing
What is the Sortino Ratio?
By using the Sortino ratio, an investor can focus on the rate of return needed to reach a specific financial goal, such as saving for vacation or making a down payment on a home. It looks at ... 
Investing Basics
Mitigating Downside With The Sortino Ratio
Differentiate between good and bad volatility with the Sortino Ratio. 
Active Trading Fundamentals
5 Ways To Rate Your Portfolio Manager
Investopedia explains: These five performance ratios will help you measure how good your money manager is at increasing the value of your portfolio. 
Investing Basics
3 Ways To Evaluate the Performance of Alternatives
Learn about three ways to measure the performance of alternative investments. See how the commonly used Sharpe ratio has drawbacks in measuring volatility. 
Active Trading Fundamentals
How The Sharpe Ratio Can Oversimplify Risk
When it comes to hedge funds, this measure is not reliable on its own. 
Bonds & Fixed Income
Understanding The Sharpe Ratio
This simple ratio will tell you how much that extra return is really worth. 
Bonds & Fixed Income
Find The Highest Returns With The Sharpe Ratio
Learn how to follow the efficient frontier to increase your chances of successful investing. 
Professionals
Performance Measures
Performance Measures 
Investing
Standard Deviation
Learn about how standard deviation is applied to the annual rate of return of an investment to measure the its volatility. 
Investing
Understanding Financial Models
A financial model is a representation of some aspects of a firm or given security. It uses historical numbers to create calculations that inform financial recommendations or predict future financial ...

What is the difference between a Sharpe ratio and a Sortino ratio
Understand the differences between the Sharpe ratio and the Sortino ratio, two riskadjusted return on investment calculations, ... Read Answer >> 
What is a good Sharpe ratio?
Understand how the Sharpe ratio is calculated, and its significance and use for investors in evaluating the performance of ... Read Answer >> 
What does standard deviation measure in a portfolio?
Dig deeper into the investment uses of, and mathematical principles behind, standard deviation as a measurement of portfolio ... Read Answer >> 
What is the difference between the expected return and the standard deviation of ...
Learn about the expected return and standard deviation and the difference between the expected return and standard deviation ... Read Answer >> 
What is the difference between a sharpe ratio and an information ratio?
Understand the meaning of the Sharpe ratio and the information ratio, and understand how they differ as tools for evaluating ... Read Answer >> 
What is the difference between standard deviation and average deviation?
Understand the basics of standard deviation and average deviation, including how each is calculated and why standard deviation ... Read Answer >>