Sortino ratio vs Sharpe ratio
By Jude Wallis
Both put excess return on top and risk underneath. Sharpe divides by total volatility, so a violently good month counts against the fund. Sortino divides by downside deviation, counting only returns below the target. At 10 percent against a 3 percent target with 8 points of downside deviation, Sortino is 0.875.
| Sortino ratio | Sharpe ratio | |
|---|---|---|
| Denominator | Downside deviation, computed from below-target returns only. | Standard deviation of every return, up and down. |
| Benchmark on top | A target you choose, often a required return. | The risk-free rate. |
| How upside is treated | Ignored. A big gain cannot make the ratio worse. | Counted as risk, because it widens the spread. |
| This portfolio | 0.875, from 7 points of excess over 8 points of downside deviation. | 0.7 if total volatility is 10 points, using the same 7 points on top. |
| Where it is preferred | Skewed strategies: options selling, trend following, anything lumpy. | Broad portfolios whose returns are roughly symmetric. |
| Comparability | Only against another Sortino using the same target. | Widely quoted, so easier to compare across managers. |
On this page
The two ratios disagree about what risk is
Standard deviation treats distance from the mean as risk whichever direction it runs. A fund that jumps 12 percent in one month is penalised exactly as hard as one that drops 12 percent, which nobody experiences that way. Sortino answers that objection by throwing away the upside half of the distribution and measuring only the returns that fell short of the target.
The top of the fraction is the same idea in both: return above a hurdle. Here that is 10 percent against a 3 percent target, which is 7 points of excess. Dividing by 8 points of downside deviation gives 0.875. Dividing the same 7 points by a 10 point total volatility would give .
Neither number means anything alone
A Sortino of 0.875 is not good or bad. It is a comparison tool, and it only compares when the target is the same on both sides. Change the target from 3 percent to zero and the ratio moves, because the excess on top moves. Sharpe has the same problem with a smaller surface: everyone uses the risk-free rate, but they do not always use the same one.
So quote the inputs, not just the answer. The Sortino ratio calculator and the Sharpe ratio calculator both show the excess and the denominator, which is what makes two funds actually comparable.
Which one to reach for
Use Sharpe when returns are roughly symmetric and you want a number other people will recognise. Use Sortino when a strategy is deliberately lopsided, because penalising its good months is measuring the wrong thing. Read both next to the raw drawdown history rather than instead of it: a ratio is a summary, and standard deviation of returns throws away the order events happened in. How the Sharpe ratio works covers the older of the two in full. This is educational material, not financial advice.
Worked examples
A 10 percent return against a 3 percent target
A portfolio returned 10 percent, the target return is 3 percent, and downside deviation is 8 percent. What is the Sortino ratio?
- Excess return is 10 percent minus 3 percent, which is 7 points.
- Divide by the 8 points of downside deviation: 7 divided by 8 is 0.875.
The Sortino ratio is 0.875. Each point of downside deviation bought a little under a point of excess return.
A steadier fund with a higher hurdle
A second portfolio returned 12 percent against a 4 percent target, with downside deviation of 5 percent. How does it compare?
- Excess return is 12 percent minus 4 percent, which is 8 points.
- Divide by 5 points of downside deviation: 8 divided by 5 is 1.6.
The Sortino ratio is 1.6, so this fund earned far more excess per unit of downside risk despite the tougher target.
Common questions
Is Sortino always higher than Sharpe?
Usually, because downside deviation is smaller than total volatility. It is not a rule, and identical values are possible.
What target should Sortino use?
Whatever return you actually need. Zero, the risk-free rate and a required return are all in common use, so say which one.
Can either ratio be negative?
Yes, whenever the portfolio returned less than its hurdle. Both then rank badly performing funds in a confusing order.
Is this financial advice?
No. It is educational material about two risk-adjusted return measures.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.