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Sortino Ratio

Risk-adjusted return using only downside volatility.

The Sortino ratio is similar to the Sharpe ratio but uses downside deviation instead of total volatility. This focuses on 'bad' volatility (returns below the minimum acceptable return) rather than penalizing upside volatility. A higher Sortino indicates better risk-adjusted returns considering only downside risk.

Formula
Sortino=E[rp]−rfσd\text{Sortino} = \frac{E[r_p] - r_f}{\sigma_d}
Where
E[rp]E[r_p]=Expected portfolio return
rfr_f=Risk-free rate
σd\sigma_d=Downside deviation
Related Terms

Sharpe Ratio

Risk-adjusted return: excess return divided by volatility.

Portfolio Volatility

Standard deviation of portfolio returns — total risk including diversification effects.

Efficient Frontier

The set of portfolios offering the highest return for each level of risk.

Covariance Matrix

Captures how asset returns move together — the foundation of diversification.

Minimum Variance Portfolio

The portfolio with the lowest possible volatility.

Maximum Sharpe Portfolio

The portfolio with the highest risk-adjusted return.