Sortino ratio
Quantitative Finance glossary · Quantitative Finance
Definition
Risk-adjusted return using only downside deviation (semi-standard-deviation) in the denominator; rewards positive skew.
Sortino ratio in plain English
The Sortino ratio starts from a common-sense complaint about the Sharpe ratio: not all 'bounciness' deserves to be punished. If an investment sometimes jumps UP unexpectedly, that's a happy surprise, not a risk — you only truly care about the DOWNSIDE swings that lose you money. So Sortino keeps the same reward-per-risk idea but measures risk using only the bad (below-target) moves, ignoring upside wobble. The payoff: a strategy that tends to surprise you pleasantly (positive skew) scores better here than it would under Sharpe, which is fairer to those returns.
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