Risk & position sizing
What is the Sortino Ratio and why is it preferred over Sharpe for asymmetric risk profiles?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
The Sortino Ratio is similar to the Sharpe Ratio but only accounts for downside volatility, making it preferred for strategies with asymmetric returns where large upside swings shouldn't count as risk.
How it works
By isolating harmful downside deviation rather than total volatility, the Sortino Ratio gives a more accurate risk-adjusted performance picture for trend-following or options strategies with skewed return profiles.
An example
Two portfolios with identical returns and total volatility can have different Sortino Ratios if one has more frequent small gains and the other has rare large losses.
Risk & limitations
Sortino Ratio calculations require a reliable downside deviation target, and results can vary significantly depending on which minimum acceptable return is chosen.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.