Sortino ratio

The Sortino ratio is a variant of the Sharpe ratio. Both measure the return earned for the risk taken. They differ in what counts as risk.

• The Sharpe ratio divides by total volatility, which rises with sharp gains as much as with sharp losses.
• The Sortino ratio divides by downside deviation, which looks only at returns below a target, usually the risk-free rate or zero.

In words: take the fund's return, subtract the risk-free rate, and divide by the downside deviation.

For example, two funds both returned 13% a year with the same volatility. One got its volatility mostly from sudden jumps up, the other from sudden drops. Their Sharpe ratios are the same, but the first has a higher Sortino ratio, because it had less downside.

How to read it:

• A higher Sortino ratio means more return for each unit of downside risk.
• It is usually higher than the same fund's Sharpe ratio, since downside deviation is smaller than total volatility.

Like the Sharpe ratio, it is most useful for comparing funds in the same category over the same period. Drawdown shows the size of the falls directly.