Question 1

What is the Sortino Ratio?

Accepted Answer

The Sortino Ratio is a variation of the Sharpe Ratio that differentiates between harmful downside volatility and normal upside volatility. It measures risk-adjusted return using only the downside deviation (negative return fluctuations) instead of the total standard deviation. Formula: Sortino Ratio = (Portfolio Return - Target Return) / Downside Deviation. Higher values indicate better risk-adjusted performance on the downside.

Question 2

When should you use the Sortino Ratio instead of the Sharpe Ratio?

Accepted Answer

Use the Sortino Ratio when evaluating strategies that have asymmetric return distributions — strategies that generate many small losses and occasional large gains, or vice versa. Momentum strategies often show higher Sortino than Sharpe Ratios because they have positive skew (cutting losses and letting winners run). The Sortino Ratio is preferred by many practitioners because it only penalizes returns below the target (minimum acceptable return), not upside surprises.

Question 3

What is a good Sortino Ratio?

Accepted Answer

A Sortino Ratio above 1.0 is generally considered good, and above 2.0 is excellent. Because the Sortino Ratio uses only downside deviation (which is typically smaller than total standard deviation), Sortino Ratios are almost always higher than Sharpe Ratios for the same strategy. Tactical momentum strategies like GEM typically show Sortino Ratios of 1.0–1.5 historically.