The Sortino ratio is a refinement of the Sharpe ratio. Both measure return per unit of risk — but where Sharpe uses total volatility, Sortino uses only downside volatility (the deviation of losing/negative returns). It answers: how much return did you earn per unit of bad risk?

Why the distinction matters

Sharpe treats all volatility as risk — including big upside moves. That unfairly penalizes a strategy with occasional huge winners, because those winners increase total volatility and drag the Sharpe down. But nobody complains about upside volatility. Sortino ignores it and measures only the downside swings that actually hurt.

How they differ in practice

For a symmetric, smooth strategy, Sharpe and Sortino tell a similar story. For a strategy with positive skew — many small losses and occasional large wins (like trend-following or long options) — Sortino is far more flattering and more honest, because it doesn't count the big wins against you. A low Sharpe but high Sortino often reveals a strategy that's volatile mostly to the upside.

Volatility to the upside isn't risk — it's the goal. Sortino is the ratio that finally agrees.

Using it

Sortino is one of several lenses — pair it with Sharpe, profit factor, max drawdown, and expected value for a full picture. No single number captures a strategy, but for anything with asymmetric returns, Sortino corrects Sharpe's biggest blind spot: confusing good volatility with bad.