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The Sortino ratio is a measure of a risk-adjusted return of an investment asset. It is an extension of the Sharpe ratio. While the Sharpe ratio takes into account any volatility in return of an asset, Sortino ratio differentiates volatility due to up and down movements. The up movements are considered desirable and not accounted in the volatility.

That is, the Sortino ratio does not penalize a fund for its upside volatility. The ratio is calculated as

${\displaystyle S={\frac {E}{\sigma _{d}}}}$,

where ${\displaystyle R}$ is the asset return, ${\displaystyle R_{f}}$ is the return on a benchmark asset, such as the risk free rate of return, ${\displaystyle E}$ is the expected excess return, and ${\displaystyle \sigma _{d}}$ is the standard deviation of the negative excess returns, known as downside volatility.

The ratio was developed by Frank A. Sortino.

See also

• Modern portfolio theory
• Upside potential ratio

External links

• A note on Sortino Ratio by Dr. Frank A. Sortino

• Financial ratios
• Mathematical finance