What Is the Sortino Ratio (and When to Use It Instead of Sharpe)

The Sortino ratio answers the same question as the Sharpe ratio: does an investment compensate for the risk it takes on? But it fixes Sharpe's main flaw.

The problem with Sharpe

Sharpe divides excess return by total volatility: upside and downside alike. But why penalize upward moves? A portfolio that rallies hard and rarely drops can be unfairly punished if its upside dispersion is high.

The Sortino formula

• Sortino = (Return − Rf) / Downside volatility

The difference is in the denominator: instead of the standard deviation of all returns, it uses only the downside deviation — computed exclusively from days with negative returns. Good days no longer count against the portfolio.

How to interpret it

The scale is similar to Sharpe, but values tend to run higher because the denominator is smaller (negative returns only):

• > 1: the portfolio generates real return per unit of downside risk taken.
• > 2: excellent. Few real-world portfolios sustain this long-term.
• < 0: it doesn't beat the risk-free rate once adjusted for downside risk.

Which one should you use?

If returns are roughly symmetric, Sharpe and Sortino tell a similar story. Sortino is more valuable when the distribution is skewed — a fat left tail (frequent sharp drops) or a fat right tail (extreme rallies). OjoAlTicker shows both ratios on ticker pages and in the portfolio optimizer.

Calculate your portfolio's Sharpe and Sortino →