Loans
Cards
Insurance
Investment
Stock Market
Electronics Mall
CIBIL Score
Knowledge Centre
Calculators
Do not call
En
Explore the Sortino Ratio to learn its formula, calculation steps, and example for measuring downside-risk-adjusted returns.
The Sortino Ratio is an investment metric used to evaluate risk-adjusted returns, focusing specifically on downside risk rather than total volatility. Unlike the Sharpe Ratio, which treats all fluctuations as risk, the Sortino Ratio distinguishes between harmful volatility (negative returns) and harmless upside movement.
This makes it a more precise tool for evaluating portfolios, mutual funds, equities, alternatives, and strategies where downside protection is a priority.
The Sortino Ratio measures how much return an investment generates per unit of downside deviation. It helps determine whether a portfolio’s returns justify the downside risk taken.
It is an upgraded version of the Sharpe Ratio.
Only negative volatility is counted as “risk.”
A higher Sortino Ratio indicates improved risk-adjusted performance.
It is highly useful for assessing funds that aim for lower drawdowns.
A Sortino Ratio above 1 is commonly observed, while values above 2 are less frequent and indicate higher return relative to downside risk.
The Sortino Ratio matters because it gives a clearer and more investor-friendly picture of actual risk.
Separates harmful volatility from overall volatility
Helps investors judge downside-protected performance
Useful for comparing mutual funds, PMS strategies, and equity portfolios
Suitable for risk-averse investors
Reveals how efficiently a portfolio converts risk into returns
This ratio is especially relevant in markets with frequent drawdowns or for strategies focused on capital protection.
The Sortino Ratio formula is:
Sortino Ratio = (Portfolio Return − Risk-Free Rate) ÷ Downside Deviation
Portfolio Return: The average or expected return of the investment
Risk-Free Rate: Typically government securities or treasury returns
Downside Deviation: Standard deviation of only negative returns (returns below the minimum acceptable threshold)
Minimum Acceptable Return (MAR): Usually 0% or risk-free rate; defines what is considered “loss”
By focusing on downside deviation, the Sortino Ratio eliminates noise created by positive volatility.
Follow this process:
Collect periodic returns (daily, weekly, monthly, etc.).
Many analysts pick 0%, risk-free rate, or benchmark returns.
Ignore all positive or neutral returns.
Use the standard deviation formula but apply it ONLY to negative return values.
Sortino Ratio = (Average Return − Risk-Free Rate) ÷ Downside Deviation
This final number shows how well the investment compensates you for the downside risk.
Assume:
Average annual return = 15%
Risk-free rate = 5%
Downside deviation = 6%
Sortino Ratio = (15 − 5) ÷ 6 = 10 ÷ 6 = 1.67
Interpretation:
A Sortino Ratio of 1.67 indicates return relative to downside risk. The portfolio is generating return efficiently while keeping harmful volatility in control.
The Sortino Ratio measures:
Downside risk
Sensitivity to negative returns
Ability to protect capital during market declines
Efficiency of returns adjusted for harmful volatility
It tells you how much "good return" the investor receives per unit of “bad volatility.”
The Sortino Ratio improves upon the Sharpe Ratio by treating returns more intelligently.
| Aspect | Sortino Ratio | Sharpe Ratio |
|---|---|---|
Risk Considered |
Downside deviation only |
Total volatility (upside + downside) |
Volatility Treatment |
Only penalises negative returns |
Penalises all volatility |
Suitable For |
Capital-protected strategies |
Stable-return strategies |
Accuracy |
Higher for real-world investing |
Sometimes misleading |
Sortino Ratio is more meaningful for investors who care about downside protection.
The Sortino Ratio, while robust, has certain limitations:
It depends heavily on the chosen MAR value
Requires sufficient data to compute downside deviation accurately
Not suitable for comparing portfolios with extremely asymmetric returns
Overly smooth datasets may inflate the ratio
Should be used alongside other performance indicators
Despite these, it remains one of the most accurate measures of risk-adjusted performance.
The Sortino Ratio is widely applied across:
Assess how well a portfolio protects capital while generating returns.
Equity funds, hybrid funds, and multi-asset funds are often ranked using this metric.
Strategies focused on low drawdowns rely heavily on the Sortino Ratio.
Suitable for long-term conservative portfolios.
Used by analysts, advisors, and rating agencies.
Here is a quick wrap-up to help you connect the concepts and apply them confidently in performance analysis.
The Sortino Ratio measures risk-adjusted performance focusing on downside risk compared to the Sharpe Ratio.
It considers only downside volatility, which is what investors truly fear.
A higher Sortino Ratio indicates more efficient return generation relative to risk.
Commonly applied to compare investments where downside protection is important.
Should be paired with Sharpe Ratio, beta, drawdown, and other performance metrics for full insight.
Overall, the Sortino Ratio offers one of the clearest pictures of return quality in relation to actual investment risk.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sortino ratio measures returns relative only to downside deviation, whereas Sharpe ratio measures returns relative to total volatility. The distinction arises because Sortino focuses purely on negative movements, while Sharpe treats upward and downward fluctuations as equal forms of risk.
Sortino ratio is a risk-adjusted performance measure that shows how much excess return an investment generates for every unit of downside risk. The metric isolates negative return variability to provide a clearer view of downside performance.
A Sortino ratio example can be illustrated using a portfolio with a 12 % return, a 4 % risk-free rate, and a downside deviation of 5. Applying the formula (12 − 4) ÷ 5 gives a value of 1.6, indicating the level of return achieved per unit of downside risk.
.jpeg)
78231
Unlock the world of credit! From picking the perfect card to savvy loan management, navigate wisely.
44693
Money Management and Financial Planning covers personal finance basics, setting goals, budgeting...
21201
Explore the investment cosmos! From beginner's guides to sharp-witted strategies, explore India's treasure trove of options.
34789
Navigate the tax maze with ease! Uncover Income Tax 101, demystify jargon with Terms for Beginners, and choose between Old or New Regimes.
9230
Discover essential insights on various types of insurance in India.
4409
Welcome to Tech in Finance, where we explore the exciting intersection of technology and finance...
Personal Loan, Business Loan, Collateral
Credit Score, Report & Analysis
Fixed Deposit, Mutual Fund, NPS, Demat A/C, SGB
General Insurance, Life Insurance, Term Insurance
Stocks, IPOs
Smart Phone, Speaker, EarPhone
Academy 
.jpeg "image not found")
