Definition in one sentence: the Sortino ratio measures a strategy's return relative only to its downside volatility — it ignores positive variations to focus only on the risk that actually hurts.
The formula, and what it measures
The Sortino borrows the logic of the Sharpe ratio, with one decisive nuance in the denominator. Where the Sharpe divides by total volatility, the Sortino divides by downside volatility alone (the downside deviation): only deviations below a threshold — usually zero return or the minimum acceptable return — are counted.
(return − threshold) ÷ downside volatilityIn practice: a strategy that jumps sharply to the upside is no longer penalised for those good surprises. Only the drops count in the measure of risk.
How to read it: good vs bad
The thresholds are close to the Sharpe's, but the Sortino is almost always higher than the Sharpe for a given strategy — since upside volatility is removed from the denominator. A Sortino above 2 is generally considered solid. The golden rule: never compare a Sortino to a Sharpe directly, nor two ratios computed over different windows.
The classic mistake
Believing the Sortino alone fixes every flaw of the Sharpe. It settles the upside/downside asymmetry, but it remains blind to the depth of a one-off collapse: two strategies with the same Sortino can have very different maximum drawdowns. For that dimension, the Calmar ratio is the one to watch.
At Sextant
Sextant is a transparent quant platform: no ratio is shown on its own. The Sortino reads alongside the Sharpe, the maximum drawdown and the abstention rate on the dashboard. The methodology states which reference threshold is used for downside volatility — a detail that changes everything in a comparison.
Frequently asked questions
What is the difference between Sortino and Sharpe?
The Sharpe divides return by total volatility (ups and downs alike); the Sortino divides only by downside volatility. The Sortino therefore rewards strategies that rise sharply without being penalised, and reflects risk as an investor actually experiences it.
Is the Sortino always higher than the Sharpe?
Almost always, yes, since it removes upside volatility from the denominator. That is why you should never compare a Sortino to a Sharpe directly: they are two different scales.
What is the limit of the Sortino ratio?
It remains blind to the depth of a rare one-off collapse. Two strategies with the same Sortino can have very different maximum drawdowns. For that dimension, look at the Calmar ratio.