The Sortino ratio divides a strategy's excess return by its downside deviation only — a variant of the Sharpe ratio that penalises harmful downward volatility while leaving harmless upside swings out of the risk measure. Where Sharpe treats all variability as risk, Sortino counts only the periods that finish below zero, on the reasoning that investors mind losses far more than they mind unexpectedly good months.
Also seen as: Sortino, downside-adjusted return
How is the Sortino ratio calculated?
The Sortino ratio takes the strategy's excess return over the risk-free rate and divides it by the downside deviation, but the two halves use different baselines. The numerator is the strategy's CAGR minus the risk-free rate, whatever the Reinvest profits setting. The downside deviation in the denominator is measured against a 0% per-period threshold: only periods with a negative return feed the downside deviation, while periods at or above 0% are left out.
where the numerator is the excess return over the risk-free rate and the downside deviation counts only the periods that finished below 0%. It is built like the Sharpe ratio but swaps total volatility for downside-only volatility in the denominator.
What counts as a strong Sortino ratio?
Higher is better — more return earned per unit of harmful variability. Because the denominator only counts downside, a strategy's Sortino ratio is usually higher than its Sharpe ratio; the gap between the two is itself telling, since a wide gap means most of the strategy's volatility was to the upside.
How does Fincanva handle it?
- Fincanva reports the Sortino ratio on the Strategy analytics page only — one bar per strategy in the Sortino column of its Each strategy, against the Combined card. It is not a row on the main metrics table and not a KPI card. A strategy that is not part of a Combined still appears on that card — alone — so it shows a Sortino ratio too.
- The numerator is the excess return over the risk-free rate, always measured from CAGR: unlike the Sharpe row of the metrics table, it does not switch to AAGR when Reinvest profits is off.
- The risk-free rate it subtracts is the period average of the 3-Month US Treasury Bill series over the window, with a flat 2% a year standing in for any months outside that series — see risk-free rate.
- The denominator counts only periods that finished below a 0% per-period threshold; periods at or above 0% are ignored, so only downside variability is penalised.
- A higher value means more return for the same amount of downside variability.
What does it look like in practice?
Take two strategies that both return 9% a year. One climbed in bumpy but mostly upward steps; the other posted the same 9% but with several sharp drops along the way. Their Sharpe ratios can look alike, because Sharpe counts every swing — up or down — as risk. The Sortino ratio only puts the downward moves in its denominator, so the strategy with the sharp drops gets the lower Sortino. Same total return, but the ratio rewards the strategy whose volatility was mostly the harmless, upside kind.
No Sortino ratio is a target to aim for or a promise about future downside.