# Sortino ratio

> The Sortino ratio is the Sharpe ratio with the upside taken out of the risk measure. It divides excess return by downside deviation, so gains no longer count against you.

> These figures are derived from a return series that the app currently flags as being reworked.
> Values and holdings are unaffected. See [about these numbers](/metrics/about-these-numbers).

The Sortino ratio answers the same question as the
[Sharpe ratio](/metrics/sharpe-ratio) with one correction: it stops treating
gains as risk.

Sharpe divides your excess return by total volatility, which counts every move
away from average, including the ones in your favour. A portfolio that jumped
sharply upward is penalised exactly as much as one that fell just as sharply.
That does not match how anyone actually experiences risk. Sortino fixes it by
measuring only the falls.

## How it is calculated

```
Sortino ratio = (mean daily return − daily risk-free rate) / downside deviation × √252
```

The numerator is identical to Sharpe. What changes is the denominator.

**Downside deviation** uses only the days your portfolio fell. Gylder squares
each negative daily return, averages those squares across the number of down
days, and takes the square root. Days you gained contribute nothing at all,
neither to the sum nor to the count.

The result is annualised with √252, the same as everything else in the risk
grid.

## The risk-free rate is an assumption

Gylder currently uses a fixed **3% annual risk-free rate**, not a live market
rate. It is a configuration constant chosen to sit roughly in the euro short
rate environment, and it is disclosed here because it feeds the number.

This matters when you compare your figure against one from somewhere else. A
Sortino ratio computed against a different risk-free assumption is not directly
comparable to this one, and the gap widens the lower your returns are.

## How to read it

Higher means more excess return per unit of downside movement. Because the
denominator ignores upside, a Sortino ratio is normally higher than the Sharpe
ratio for the same portfolio and window.

That gap is the interesting part. A portfolio whose Sortino sits far above its
Sharpe is one whose volatility is mostly upward, which is the pleasant kind. A
portfolio where the two are close has volatility spread evenly in both
directions.

Gylder does not tell you what a good Sortino ratio is. Any threshold we picked
would be an opinion presented as a fact, and it would depend on the asset class
and the window in ways a single number cannot carry.

## What it misses

Dividing by the count of down days only means a portfolio with very few losing
days can produce a small denominator and therefore a large ratio, on thin
evidence. Treat a striking figure over a short window as a small sample rather
than a finding.

It also inherits Sharpe's blind spots. It says nothing about how the losses
were distributed in time, so it cannot distinguish many small falls from one
severe one. For that, see [maximum drawdown](/metrics/max-drawdown) and the
[Calmar ratio](/metrics/calmar-ratio).