Sortino ratio
Principles of Finance glossary · Principles Of Finance
Definition
Excess return divided by downside deviation.
Sortino ratio in plain English
The Sortino ratio is a fairer cousin of the Sharpe ratio, and the fix it makes is clever: it only counts the swings that actually hurt you. Regular risk measures penalize ALL bounciness, but honestly, nobody complains when their investment jumps UP — the pain is only on the downside. So the Sortino ratio divides your extra reward by the "downside deviation," which measures just the bad, below-target drops. It's like judging a driver only by their near-crashes and hard brakes, not by the times they happily sped up — you care about the scary moments, not the pleasant surprises.
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