# Sortino Ratio > The Sortino ratio divides excess return by downside deviation, penalising only harmful volatility. Learn the formula, a worked example and when to prefer it. Source: https://learn.tradelabsai.com/portfolio/sortino-ratio/ Track: Portfolio and Performance · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Sortino Ratio", https://learn.tradelabsai.com/portfolio/sortino-ratio/ The Sharpe ratio treats all volatility as bad, including large gains. Most investors do not mind upside surprises; what hurts is losses. The Sortino ratio, named after Frank Sortino, addresses this by dividing excess return by downside deviation, a measure of volatility that counts only returns below a target. Strategies with frequent big gains and limited losses score better on Sortino than on Sharpe, while strategies with hidden crash risk do not get rewarded for smooth upside. ## The formula ``` Sortino ratio = (Portfolio return - Target return) / Downside deviation ``` - **Target return:** often zero or the risk free rate; also called the minimum acceptable return (MAR). - **Downside deviation:** the square root of the average of squared shortfalls below the target, where returns above the target count as zero shortfall. ## Calculating downside deviation 1. **Subtract the target** from each period's return. 2. **Replace positive results with zero.** 3. **Square** the remaining negative values. 4. **Average** across all periods (including the zeros). 5. **Take the square root,** then annualise. **Example: A monthly Sortino calculation** Six monthly returns are +4%, minus 2%, +3%, minus 1%, +5% and minus 3%, with a target of 0%. The shortfalls are 0, minus 2, 0, minus 1, 0 and minus 3. Their squares are 0, 4, 0, 1, 0 and 9, summing to 14. Averaged over six months, that is about 2.33, and the square root is about 1.53% monthly downside deviation. Annualised by the square root of 12, that is about 5.3%. The average monthly return is 1%, or about 12% a year simply annualised. The Sortino ratio is roughly 12 divided by 5.3, or about 2.3. Use the [Sharpe and Sortino Calculator](https://learn.tradelabsai.com/tools/sharpe-and-sortino-calculator/) for your own figures. ## Sharpe versus Sortino | Strategy profile | Sharpe | Sortino | |---|---|---| | Symmetric returns | Similar ranking | Similar ranking | | Big occasional gains, small losses (positive skew) | Understates quality | Rewards it | | Small steady gains, rare large losses (negative skew) | May look good | Still affected by the losses when they appear in the data | Trend following and long option strategies often have positive skew and look better on Sortino. Option selling has negative skew; both ratios can look excellent until a crash appears in the record. See [Skewness and Kurtosis](https://learn.tradelabsai.com/math/skewness-and-kurtosis/) and [Trend Following](https://learn.tradelabsai.com/strategies/trend-following/). ## Interpreting values There is no universal scale, but because downside deviation is usually smaller than total volatility, Sortino ratios are typically higher than Sharpe ratios for the same strategy. Compare Sortino ratios only with other Sortino ratios, using the same target and frequency. ## Limitations - **Few negative periods** make downside deviation unreliable; a short record with only a few losses can produce huge ratios. - **Target choice** changes the result; always state it. - **Calculation variations:** some sources average squared shortfalls only over negative periods, which inflates downside deviation. State your method. - **Does not capture drawdown depth or duration.** See [Maximum Drawdown](https://learn.tradelabsai.com/portfolio/maximum-drawdown/) and [Calmar and MAR Ratio](https://learn.tradelabsai.com/portfolio/calmar-and-mar-ratio/). ## When to use it - **Comparing strategies with asymmetric returns,** such as trend following versus mean reversion. - **Evaluating strategies** where investors care about losses below a specific threshold. - **Alongside Sharpe,** not instead of it; a large gap between the two tells you about the shape of the return distribution. ## Frequently asked questions ### What is the Sortino ratio? A risk adjusted return measure that divides excess return over a target by downside deviation, penalising only returns below the target. ### Is the Sortino ratio better than the Sharpe ratio? It is more informative for strategies with asymmetric returns, but it is less reliable with few losing periods. Using both together is best. ### What is a good Sortino ratio? It depends on the target and data frequency; it is usually higher than the Sharpe ratio for the same strategy, and should be compared like for like. Next, learn ratios based on drawdowns in [Calmar and MAR Ratio](https://learn.tradelabsai.com/portfolio/calmar-and-mar-ratio/). ## Continue learning - Next lesson: [Calmar and MAR Ratio](https://learn.tradelabsai.com/portfolio/calmar-and-mar-ratio/) - Previous lesson: [Sharpe Ratio](https://learn.tradelabsai.com/portfolio/sharpe-ratio/) - Related: [Sharpe Ratio](https://learn.tradelabsai.com/portfolio/sharpe-ratio/): The Sharpe ratio measures return per unit of risk. Learn the formula, how to annualise it, what counts as a good Sharpe ratio, its limitations and common mistakes. - Related: [Sharpe and Sortino Calculator](https://learn.tradelabsai.com/tools/sharpe-and-sortino-calculator/): Free Sharpe and Sortino ratio calculator. Paste your monthly, weekly or daily returns and get annualised return, volatility, Sharpe and Sortino ratios. - Related: [Omega Ratio](https://learn.tradelabsai.com/portfolio/omega-ratio/): The Omega ratio compares the total of returns above a threshold with the total below it, using the whole return distribution. Learn the formula and how to read it. - Related: [Skewness and Kurtosis](https://learn.tradelabsai.com/math/skewness-and-kurtosis/): Skewness measures whether returns lean to one side; kurtosis measures tail heaviness. Learn the formulas, what they reveal about strategies and how to use them. - Related: [Calmar and MAR Ratio](https://learn.tradelabsai.com/portfolio/calmar-and-mar-ratio/): The Calmar and MAR ratios compare annual return with maximum drawdown. Learn the formulas, how they differ, a worked example and their strengths and weaknesses.