What is Sortino Ratio?
A risk-adjusted return measure that penalizes only downside volatility.
Formal Definition
The Sortino ratio refines the Sharpe ratio by dividing excess return by downside deviation, the standard deviation of only negative returns, rather than total volatility. This rewards strategies whose swings are mostly to the upside and better reflects an investor's real concern: losses, not gains. Higher values indicate stronger downside-adjusted performance.
In Simple Terms
It is like the Sharpe ratio but fairer, because it only counts the scary downward moves as risk, not the pleasant upward ones. After all, no one complains when their portfolio jumps higher.
Example
Two funds with the same Sharpe ratio can differ in Sortino: the one whose big swings are mostly upward scores higher because its downside deviation is smaller.