Sortino ratio

Also seen as: Sortino, downside-adjusted return

How is the Sortino ratio calculated?

The Sortino ratio takes the strategy's excess return over the risk-free rate and divides it by the downside deviation, but the two halves use different baselines. The numerator is the annualised return (CAGR when Reinvest profits is on, AAGR when it is off) minus the risk-free rate, exactly as in the Sharpe ratio. The downside deviation in the denominator is measured against a 0% per-period threshold: only periods with a negative return feed the downside deviation, while periods at or above 0% are left out.

where the numerator is the excess return over the risk-free rate and the downside deviation counts only the periods that finished below 0%. It is built like the Sharpe ratio but swaps total volatility for downside-only volatility in the denominator.

What counts as a strong Sortino ratio?

Higher is better — more return earned per unit of harmful variability. Because the denominator only counts downside, a strategy's Sortino ratio is usually higher than its Sharpe ratio; the gap between the two is itself telling, since a wide gap means most of the strategy's volatility was to the upside.

Defaults in Fincanva

• Fincanva reports the Sortino ratio on the Strategy analytics table only — one row per strategy inside a Combined, in the Sortino column. It is not a row on the main metrics table and not a KPI card. A strategy that is not part of a Combined still gets a row on that table — a single one — so it shows a Sortino ratio too.
• The numerator is the excess return over the risk-free rate — the same as the Sharpe ratio — using the annualised return (CAGR with Reinvest profits on, AAGR with it off).
• The denominator counts only periods that finished below a 0% per-period threshold; periods at or above 0% are ignored, so only downside variability is penalised.
• A higher value means more return for the same amount of downside variability.

Worked example

Take two strategies that both return 9% a year. One climbed in bumpy but mostly upward steps; the other posted the same 9% but with several sharp drops along the way. Their Sharpe ratios can look alike, because Sharpe counts every swing — up or down — as risk. The Sortino ratio only puts the downward moves in its denominator, so the strategy with the sharp drops gets the lower Sortino. Same total return, but the ratio rewards the strategy whose volatility was mostly the harmless, upside kind.

These figures describe what a strategy would have done on historical data, not what it will do, and no Sortino ratio is a target to aim for or a promise about future downside. Fincanva provides no financial advice — see Is this financial advice?.