Sharpe penalizes a fund for jumping upwards; Sortino doesn't. When Sortino is much higher than Sharpe, the fund's volatility is mostly good volatility.
The change from Sharpe is in the denominator. Instead of the standard deviation of all daily returns, Sortino divides the excess return by the downside deviation — the standard deviation of only the days that fell below the target (the risk-free rate, 6.5% here, expressed daily). Up days contribute nothing to the risk term. The numerator is identical, so for any fund Sortino is always at least as high as Sharpe, and the gap between the two is a direct read of how lopsided its returns are.
What the gap means in practice. A momentum or small-cap fund that grinds sideways for months and then gaps up will show a Sortino far above its Sharpe: most of its variance was upside. A fund that falls sharply and recovers slowly will show the two close together, because its variance was where it hurts. Two funds with the same Sharpe of 0.9 can therefore be very different holdings — the one with Sortino 1.8 spent its volatility going up, the one with Sortino 1.0 did not.
Where it misleads. Downside deviation is computed from fewer observations than total deviation (only the losing days), so it is noisier, and for a fund with very few losing days — a liquid or overnight fund — the denominator can be tiny and the ratio absurdly large. Treat a Sortino above 4 or 5 as a sign that the fund barely moves, not that it is exceptional. As with Sharpe, the window is trailing three years and the rate is fixed, so compare it only with other Sortino figures on this site and always alongside max drawdown, which measures the fall Sortino only summarizes.
For the formula and the constants behind this figure, see Methodology.
Guides that use Sortino ratio
2 guides put this term to work.
- Sharpe and Sortino: measuring risk-adjusted returnsVolatility, Sharpe, Sortino and maximum drawdown measure four different things, and only one of them predicts whether you will still be holding in year three.
- Treynor and information ratio: advanced tools for comparing fundsOne prices market risk, the other prices the decision to differ from the index. For choosing between active funds in a category, the second matters most.
More on risk
How rough the ride was — the half of the story a return number hides.
- Standard deviation
- How much daily returns scatter around their average, annualized. Trailing 3 years.
- Maximum drawdown
- The largest peak-to-trough fall the fund has ever had, over its full history.
- Sharpe ratio
- Return above the risk-free rate, per unit of total volatility.
- Riskometer
- A six-step risk label from Low to Very High, in SEBI's format.