Sortino Ratio
A Sharpe variant that divides excess return only by downside deviation, ignoring upside volatility as a "risk".
Formula
Sortino Ratio = (Strategy Return − Risk-Free Rate) / Downside Deviation
The Sortino Ratio improves on the Sharpe Ratio by using only downside standard deviation — the volatility of negative returns — as the risk denominator. This avoids penalising strategies for large up-moves, which are desirable.
For strategies with asymmetric return distributions (large winners, small losers), the Sortino Ratio gives a much more flattering and accurate picture of risk-adjusted performance than Sharpe.
Related Terms
Calmar Ratio
A risk-adjusted return measure dividing annualized return by maximum drawdown, rewarding strategies that grow without deep equity dips.
IntermediateExpectancy
The average dollar amount you expect to make per dollar risked, calculated from your win rate and average win/loss sizes.
IntermediateMaximum Drawdown
The largest peak-to-trough equity decline recorded over a strategy's full history — the worst-case loss an investor would have experienced.
IntermediateRisk-Reward Ratio
The ratio of potential profit to potential loss on a single trade. A 1:2 R:R means you risk $1 to make $2.
BeginnerSharpe Ratio
Return per unit of total risk — how much reward you earn for each unit of volatility taken. Higher is better.
Intermediate