Sortino Ratio -- Downside Risk-Adjusted Return

The Sortino ratio was developed as a refinement of the Sharpe ratio. The key difference: where Sharpe divides by total standard deviation (both up and down moves), Sortino divides only by downside deviation -- the volatility of returns that fall below a target rate (typically zero or the risk-free rate):

Sortino Ratio = (Portfolio Return - Target Return) / Downside Deviation

Why Sortino Is Often More Useful

Investors generally do not mind volatility to the upside -- a day where the portfolio gains 5% is not a problem. The Sharpe ratio penalizes this just as much as a 5% loss. The Sortino ratio corrects for this by only counting the bad volatility.

For concentrated, high-conviction portfolios -- which may have occasional large upward moves -- the Sortino ratio gives a more flattering and arguably more accurate picture of risk-adjusted performance than Sharpe.

Interpretation

The same general thresholds apply as with Sharpe: above 1.0 is good, above 2.0 is excellent. But because Sortino only uses downside deviation (which is typically lower than total standard deviation), Sortino ratios are usually higher than Sharpe ratios for the same portfolio. Always compare each ratio against itself, not against Sharpe values.