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Sortino Ratio
The Sortino ratio is excess return over downside deviation — Sharpe that only punishes the left side of the return distribution.
Definition
Numerator is return minus a minimum acceptable return (often 0 or r_f). Denominator is the RMS of returns below that threshold. It still needs a sample and still hates regime shifts.
Why it matters
Investors who ‘don’t mind upside vol’ use it. It is slightly harder to game with positive skew, easier to game with a short left-tail sample.
Case
A trend book with mediocre Sharpe and decent Sortino because the right tail is fat. The ratio matched the product — until the whipsaw year.
How to read it
State the MAR. Pair with max drawdown. Sortino without a tail event in the sample is a weather report.
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