Forex glossary
Sortino Ratio
Mean return above a specified target divided by downside deviation relative to that target. The version shown divides squared shortfalls by all observations; state the target, periods and convention, and do not interpret a zero denominator as no risk.
Illustrative example
How does it work in practice?
For hypothetical monthly returns +1%, +1%, +1%, −1%, mean is 0.5%. With a zero target and squared shortfalls divided by all four observations, downside deviation is 0.5 percentage points and Sortino equals 1.
A case to work through
Positive return, missed target
Monthly model: target 2%, returns 1% and 3%; squared shortfalls are divided by all observations.
- Shortfalls are −1 percentage point and zero.
- Mean return is 2%, so the above-target numerator is zero despite nonzero downside deviation.
What follows? State the target and denominator convention.
Example boundary: A tiny sample does not establish total risk; a zero ratio does not describe the whole capital path.
A useful distinction
Sortino Ratio / Sharpe Ratio
Sharpe uses excess-return variability; Sortino uses shortfalls relative to a target.
Check your understanding
Identify a shortfall relative to a nonzero target.
Show the answer and explanation
Yes, 0.5 percentage points
A positive return can still miss its target.
Net results and risk measures
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Read the fuller explanation
Related terms
Sources and documentation
- CFA Institute: the Sortino ratio
MAR target, target-relative shortfalls and the all-observations denominator convention.
Document read:
The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.