Sortino Ratio

Loading the player...

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 risk-free rate of return from the portfolio’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:

 

 

Sortino Ratio

 

 

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 won’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 in-depth knowledge of this ratio, read Mitigating Downside With The Sortino Ratio and 5 Ways To Rate Your Portfolio Manager.

RELATED TERMS
  1. Downside Deviation

    A measure of downside risk that focuses on returns that fall ...
  2. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, ...
  3. Sterling Ratio

    A ratio used mainly in the context of hedge funds. This risk-reward ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  5. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
Related Articles
  1. 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 ...
  2. Managing Wealth

    Mitigating Downside With The Sortino Ratio

    Differentiate between good and bad volatility with the Sortino Ratio.
  3. Trading

    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.
  4. Markets

    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.
  5. Trading

    How The Sharpe Ratio Can Oversimplify Risk

    When it comes to hedge funds, this measure is not reliable on its own.
  6. Managing Wealth

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
  7. Investing

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  8. Managing Wealth

    Standard Deviation

    Learn about how standard deviation is applied to the annual rate of return of an investment to measure the its volatility.
  9. 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 ...
  10. ETFs & Mutual Funds

    PRHSX: T. Rowe Price Health Sciences Fund Risk Statistics Case Study

    Examine the risk metric of the T. Rowe Price Health Sciences Fund. Analyze beta, capture ratios and standard deviation to assess volatility and systematic risk.
RELATED FAQS
  1. What is the difference between a Sharpe ratio and a Sortino ratio

    Understand the differences between the Sharpe ratio and the Sortino ratio, two risk-adjusted return on investment calculations, ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What is the difference between a Sharpe ratio and a Traynor ratio?

    Understand the difference between two methods of evaluating portfolio returns on investment, the Sharpe ratio and the Treynor ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center