Sharpe Ratio Punishes a Big Win the Same Way It Punishes a Big Loss. Sortino Ratio Only Counts the Downside
6 min read
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6 min read
Imagine a portfolio that jumps 20% in a single good month. The Sharpe ratio treats that jump as a strike against it, the exact same way it treats a 20% crash.
That sounds backwards, because it is. Nobody complains about a surprise gain. The Sortino ratio fixes this by counting only the swings that actually hurt: the ones headed down.
The Sortino ratio divides a portfolio's excess return by its downside deviation, a measure of volatility that only looks at returns that fell below a chosen target.
(Portfolio return − Target return) ÷ Downside deviation
Three pieces go into it.
Your return. What the portfolio made over the period, same as any other risk-adjusted ratio.
The target return. Often the risk-free rate, the same anchor the Sharpe ratio uses. In Indonesia that is naturally the BI Rate, which Bank Indonesia held at 5.75% at its 18 to 19 August 2026 meeting, unchanged since a hike in June 2026.
Downside deviation. Take every return that landed below the target, measure how far below it fell, and combine those shortfalls the same way a standard deviation combines all the spread in a dataset. Any month that finished at or above the target contributes nothing to the number. It simply is not counted.
That last part is the whole idea. A standard deviation, the number the Sharpe ratio is built on, treats every swing as risk, up or down. Downside deviation throws out every up month before it even starts measuring.
Frank Sortino, then a finance professor and director of the Pension Research Institute at San Francisco State University, published the idea with Robert van der Meer in "Downside Risk," in the Journal of Portfolio Management in 1991. Their argument was simple: investors do not fear volatility itself, they fear losing money. A risk measure that punishes a lucky upside month exactly as hard as an unlucky downside one is measuring the wrong thing.
Here is why the two numbers can disagree so sharply. Picture two portfolios that both returned 14% this year, with identical overall volatility.
Portfolio A swings roughly the same amount in both directions. Its up months and down months are similar in size and frequency, an ordinary, symmetric ride.
Portfolio B swings just as much in total, but almost all of that swing comes from occasional large up months. Its down months, when they happen, are small and shallow.
| Portfolio A | Portfolio B | |
|---|---|---|
| Return for the year | 14% | 14% |
| Risk-free rate (BI Rate) | 5.75% | 5.75% |
| Excess return | 8.25% | 8.25% |
| Volatility (all swings) | 10% | 10% |
| Downside deviation (losses only) | 9% | 4% |
| Sharpe ratio | 0.83 | 0.83 |
| Sortino ratio | 0.92 | 2.06 |
Both portfolios score an identical 0.83 on the Sharpe ratio, because Sharpe only sees total volatility and both had the same 10%. The Sortino ratio tells a completely different story. Portfolio A's swings are genuinely a coin flip between up and down, so its downside deviation is nearly as large as its total volatility. Portfolio B's swings are mostly upside, so once the up months are dropped from the calculation, what is left, the actual loss risk, is much smaller. Its Sortino ratio comes out more than double Portfolio A's.
There is no universal pass mark, and the "right" Sortino ratio depends on the asset class, but these are common working bands.
Above 2.0. Strong. Most of the portfolio's volatility has been upside, not downside risk.
Between 1.0 and 2.0. Solid. A reasonable amount of the swing came from losses, but the return earned for that downside risk is healthy.
Below 1.0. The losses the portfolio took on were not paying off proportionally. Worth a closer look at what specifically drove the downside months.
Because a Sortino ratio close to a Sharpe ratio tells you a portfolio's risk really is close to symmetric, comparing the two numbers side by side is often more useful than reading either one alone. A big gap between them, like Portfolio B above, is the sign worth noticing.
Downside deviation depends entirely on which target you measure against. Switch the target from the risk-free rate to 0%, or to a required minimum return, and the same portfolio's Sortino ratio changes, sometimes a lot. Always check what target a source used before comparing two Sortino ratios from different places.
It also inherits the same backward-looking limits every risk-adjusted ratio has. A portfolio that has never faced a real downturn can carry a flattering Sortino ratio purely because its downside months so far have been small ones, not because its next downturn will be.
And downside deviation, like standard deviation, assumes a reasonably large sample of returns to be meaningful. A ratio built from six months of data is a much noisier read than one built from several years.
You need your return over a period, your target return for that period, and the downside deviation of your monthly returns, the spread of just the months that fell below target. In a spreadsheet, that means filtering to returns below your target first, then applying the standard deviation formula only to that filtered set.
NetWort computes this from your real transaction history rather than a tidied assumption about when you invested, the same real-cash-flow basis behind your actual return against a broker's headline percentage.
Your Sortino ratio sits in the Portfolio Health section of your dashboard, next to Sharpe ratio, Calmar ratio and maximum drawdown. Pull all of them up together. If your Sharpe ratio and Sortino ratio are close, your risk has been fairly symmetric. If Sortino comes out noticeably higher, more of your volatility has been the good kind than the Sharpe ratio alone would suggest.
For the current BI Rate and the wider rate picture behind this calculation, see the macro context page.