Sortino Ratio
Sortino Ratio measures risk-adjusted return using downside volatility rather than total volatility.
Allocator relevance: Medium–High — better aligns with allocator intuition when upside volatility isn’t considered harmful.
Expanded Definition
Unlike Sharpe (which uses total volatility), Sortino isolates downside deviation below a minimum acceptable return threshold. This is useful for strategies with asymmetric return profiles where upside variability is not a “risk.” Inputs matter: the chosen threshold, measurement frequency, and return series quality can materially change the ratio. Allocators use Sortino to complement Sharpe, drawdown metrics, and qualitative process evaluation.
Decision Authority & Governance
Governance requires transparent methodology: threshold selection, time horizon, frequency (monthly/quarterly), and data quality (smoothing effects in private markets). Institutions distrust ratios without clear calculation notes.
Common Misconceptions
- Sortino is always superior to Sharpe.
- The threshold choice doesn’t matter.
- Sortino is comparable across strategies without context.
Key Takeaways
- Sortino focuses on downside risk efficiency.
- Methodology transparency determines trust.
- Use alongside drawdown and liquidity measures.