Analysis & metrics

Sortino Ratio

By Jarosław Wasiński • Published: Mar 23, 2026 • Updated: Oct 11, 2026

A risk-adjusted return measure comparing return above a stated target with downside deviation relative to that target. The return frequency, target, annualisation and downside-deviation convention must be specified. A high historical value is not a guarantee of low future risk; a zero denominator makes the ratio undefined.

Example. Four hypothetical net monthly returns are −2%, +1%, +3% and +2%, averaging +1%. With a zero target and all four observations in the denominator, downside deviation = √(4/4) = 1 percentage point. Monthly Sortino is 1/1 = 1. With a +1% target, mean excess return is zero and the ratio is also zero, despite the positive mean return.

The target is not necessarily zero

Sortino assesses returns against a specified target, also called the minimum acceptable return. The target must have the same frequency as the data. A +0.5% monthly return can fall short of a +1% target without being a capital loss. Align target, currency, costs and valuation method before comparing strategies. Do not insert an annual target into a monthly calculation without an explicit conversion.

Declare the denominator convention

The chosen convention is DD = √[Σ min(0, rᵢ − T)² / N], with Sortino = (mean r − T)/DD. N includes all observations, including those above the target. Dividing only by the number of shortfalls gives a different measure: with the example’s zero target, DD would be 2% and the ratio 0.5. These variants are documented in PerformanceAnalytics: DownsideDeviation and SortinoRatio.

What the result does not guarantee

A few below-target observations can create a small, unstable denominator. With no shortfalls, DD is zero; that is not evidence that future losses are impossible. The measure does not remove gap, financing, liquidity or trade-dependence risks. Annualisation also needs a specified model and a consistent target. Do not assume Sortino always ranks strategies more usefully than Sharpe.

Target choice also affects ranking

Set the target before comparing strategies, showing sensitivity analysis where economically justified. Lowering it after reviewing results can reduce shortfall count without improving actual trading. A negative ratio means mean return is below the target with a positive denominator, rather than necessarily a cash loss on the account. Do not omit inactive periods or open positions merely to obtain a more attractive ratio.

Practical use

Record the target and both components of the ratio, rather than only a final ranking. Examine shortfall count, drawdown and extreme-loss scenarios alongside it. The four-month example teaches the calculation, not how to validate a system. In the course: performance metrics. Source checked on 11 October 2026.

FAQ

Does Sortino use only losing trades?

No. It concerns returns below the specified target, which can be positive.

Why do two programs report different values?

Check target, frequency, full versus subset denominator, costs, annualisation and the data.

← Back to the full glossary