Sortino ratio
A downside-only variant of the Sharpe ratio: excess return divided by the standard deviation of negative returns only. Penalises losses but not symmetric upside volatility.
The Sortino ratio, named for Frank Sortino, is a Sharpe-ratio variant that uses downside deviation (the standard deviation of negative-return periods only) instead of total standard deviation in the denominator. The numerator stays the same: fund return minus a chosen target rate, usually a near-cash benchmark return.
The motivation is that investors typically dislike negative volatility more than positive volatility. A fund with large positive surprises and small steady negatives looks worse on Sharpe than on Sortino. Sortino is therefore the preferred risk-adjusted metric for strategies with asymmetric return distributions: credit, option-writing, defensive equity, capital-protected products.
Sortino does not appear in the FMA Quarterly Fund Update format — the official risk indicator uses total standard deviation. Some NZ active managers publish Sortino in fact sheets as a complementary risk-adjusted metric.
Related terms
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sharpe-ratio
Sharpe ratio
A risk-adjusted return measure: excess return (fund return minus the cash rate) divided by the standard deviation of returns. Higher means more return per unit of volatility.
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volatility · σ
Standard deviation (volatility)
The statistical measure of how widely a fund's returns vary around their average. The input to the FMA risk indicator: weekly returns over five years, mapped to a 1–7 band.
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max DD · drawdown
Maximum drawdown
The largest peak-to-trough percentage decline in a fund's unit price over a measurement window. Captures worst-case past loss in a way standard deviation does not.