Sortino: A ‘Sharper’ Ratio

Red Rock

Thomas Rollinger, Scott Hoffman

Research

6 Pages

Red Rock Capital explains why the Sortino ratio offers a more useful way to evaluate risk adjusted performance than the Sharpe ratio by focusing only on downside volatility. It also shows why many published Sortino calculations are incorrect and argues that proper methodology materially changes investment comparisons.

Key Takeaways

Downside Risk Focus: The Sortino ratio replaces standard deviation with downside deviation, and the example calculation produces a 4.417 Sortino ratio using an average annual return of 10%.
Calculation Errors Matter: Using annual returns of 17%, 15%, 23%, -5%, 12%, 9%, 13%, and -4%, the paper shows why excluding zero underperformance observations produces incorrect results.
Different Rankings Emerge: From September 2003 to July 2013, Winton posted a 1.82 Sortino ratio versus the S&P 500's 0.81, highlighting how downside focused metrics can reshape manager comparisons.
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