Sortino Ratio: Measuring Return vs. Downside Risk

What is Sortino Ratio?

The Sortino Ratio measures how much extra return a portfolio earns for each unit of bad risk. “Bad risk” is defined as downside deviation, the volatility of negative returns only.

By using downside deviation instead of standard deviation, the Sortino Ratio isolates negative risk and does not penalize a portfolio for positive performance above the chosen target return (such as a 0% target or a risk-free rate).

At RecipeInvesting.com, we evaluate every Portfolio Recipe and Portfolio Ingredient using downside deviation and the Sortino Ratio as core risk-adjusted metrics.

What does Sortino Ratio tell you?

The Sortino Ratio tells you how much return you’re getting, adjusted only for downside risk.

Why is Sortino Ratio important?

• It focuses only on harmful volatility.
• It ignores “good volatility” (positive returns above the target).
• It is often considered a better risk-adjusted metric than the Sharpe Ratio for portfolios with asymmetric returns (tactical strategies, momentum, alternatives, etc.).

What is a good Sortino Ratio?

Generally:

• Higher is better.
• 1.0 or above is often considered solid.
• 0.5 to 1.0 is moderate.

Below 0.5 indicates the portfolio is not being well compensated for downside risk.

What is a typical range for Sortino Ratio?

At RecipeInvesting.com, the Sortino Ratios (for the 20 years ending November 2025) range as follows:

Portfolio Recipes (investable model portfolios)

• Low: 0.31 — Vanguard Market Neutral, Investor Class (VMNFX)
• High: 2.10 — Adaptive Allocation F (t.aaaf)

Portfolio Ingredients (asset class ETFs)

• Low: -0.26 — iShares 1–3 Year Treasury Bond (SHY)
• High: 1.70 — Invesco QQQ Trust (QQQ)

These ranges depend heavily on the time period selected. Including at least one market downturn (e.g., a bear market) typically gives a more realistic measure of downside risk. View full Sortino Ratio rankings on the Portfolio Recipes comparison page.

What do specific Sortino Ratio values mean?

• Sortino Ratio = 1.0
  The portfolio earned 1% of return for each 1% of downside risk. This is often considered a good tradeoff.
• Sortino Ratio = 0.5
  The portfolio earned only half the return needed to fully compensate for its downside volatility.
• Sortino Ratio = 0
  The portfolio did not generate any excess return relative to its downside risk.

What is the formula for Sortino Ratio?

The formula for calculating the Sortino Ratio is:

Where:

• R_p = portfolio return
• R_f = risk-free rate
• DD = downside deviation

How do you calculate Sortino Ratio?

The Sortino Ratio calculation has three steps:

Step 1 Start with the portfolio’s return.

• • Example: the Adaptive Asset Allocation F Portfolio (t.aaaf) has an annualized return of 14.8% over the past 20 years. 

Step 2 Subtract the risk-free return.

• • This isolates the portion of the portfolio’s performance that exceeds what an investor could have earned with no risk.
  • The risk-free return (based on 3-month T-bill) is 0.31%.
  • The result is the excess return.
  • Example: the risk-free return is 0.31%, so the excess return is 14.8% - 0.31 %, which is 14.49%

Step 3 Divide the excess return by the portfolio’s downside deviation (DD).

• • Downside deviation measures how much the portfolio’s returns fall below a minimum acceptable return.
  • A lower downside deviation means the portfolio has fewer or smaller negative-return months.
  • A higher downside deviation means more downside volatility.
  • Example: the downside deviation (over 20 years) for the Adaptive Asset Allocation F Portfolio (t.aaaf) is 6.4%. So the excess return of 14.49% divided by 6.4% is 2.26, which is the Sortino Ratio for t.aaaf.

• Because Downside Deviation (DD) is in the denominator, a lower DD produces a higher Sortino Ratio. A higher DD (greater bad risk) produces a lower Sortino Ratio.
• In this way, the Sortino Ratio expresses risk-adjusted performance, showing how much excess return the portfolio generates for each unit of bad risk it takes on.
• All RecipeInvesting.com model portfolios (including t.aaaf, s.6040, and others) have their Sortino Ratios calculated using this exact method.

Can you explain Sortino Ratio graphically?

The Sortino Ratio is the slope of each line: the steeper the line, the better the risk-adjusted return. Each line shows the tradeoff between return and downside deviation. A steeper line means the portfolio generates more return per unit of downside risk. 

What is the Sortino Ratios for example portfolios?

Below are Sortino Ratios for six sample portfolios, calculated over a 20-year period ending November 2025:

What’s the difference between Sortino Ratio and Sharpe Ratio?

• Sharpe Ratio uses total volatility (upside and downside using standard deviation) as its metric for risk adjustment.
• Sortino Ratio uses downside volatility only as its metric for risk adjustment.

For investors who want to avoid punishing positive returns, the Sortino Ratio is often more meaningful.

What topics are related to Sortino Ratio?

• Sharpe Ratio
• Treynor Ratio
• Downside Deviation
• Portfolio Recipes overview
• Portfolio Ingredients overview