Sortino ratio

Return above a minimum acceptable return divided by downside deviation, the volatility of returns below that minimum. Unlike the Sharpe ratio, it penalises only the volatility that hurts.

Where you will meet it

Sortino ratio appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Set out risk measures suited to return distributions that are not normal
  CFA Level I · Alternative Investments

  “Downside deviation, the Sortino ratio, maximum drawdown and value at risk each address part of it by focusing on the loss side, though none is a complete substitute for understanding the strategy's payoff structure.”

• Compute and interpret maximum drawdown, drawdown duration, upside and downside capture ratios, the appraisal ratio and the Sortino ratio
  CFA Level III · Performance Measurement

  “The Sortino ratio = (Rp − MAR) ÷ downside deviation, where downside deviation counts only returns below the minimum acceptable return; a portfolio earning 9% with a 3% MAR and 8% downside deviation scores 0.75.”

• Explain where appraisal measures and associated metrics fall short
  CFA Level III · Performance Measurement

  “The Sortino ratio depends on the minimum acceptable return chosen and needs enough below-target observations.”

See also

Sharpe ratio

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with S · Glossary