Sortino Ratio
The Sortino Ratio improves on the Sharpe Ratio by focusing exclusively on downside volatility, recognizing that investors don't mind upside surprises.
What You Will Learn: You'll learn how the Sortino Ratio improves on the Sharpe Ratio by focusing only on downside volatility. Discover why this metric better reflects investor concerns and how it favors real estate investments with stable cash flows.
Definition
The Sortino Ratio improves on the Sharpe Ratio by focusing exclusively on downside volatility. It recognizes that investors don't mind upside surprises—only downside losses hurt.
Formula
Sortino Ratio = (Portfolio Return - Target Return) / Downside DeviationOr: Excess Return ÷ Downside Risk Only
Key Difference from Sharpe
| Sharpe Ratio | Sortino Ratio |
|---|---|
| Uses total standard deviation | Uses downside deviation only |
| Penalizes all volatility (up and down) | Penalizes negative volatility only |
Why Sortino Matters
Investor-Centric
Measures risk the way investors actually experience it—as potential losses
Captures Asymmetry
Rewards investments with limited downside and unlimited upside
Better for Real Assets
Real estate typically has more upside than downside volatility
Downside Protection Focus
When capital preservation is critical, prioritize high Sortino
Sortino Ratio Benchmarks
| Range | Assessment |
|---|---|
| >2.0 | Excellent—strong returns, minimal downside |
| 1.0-2.0 | Good—well-compensated for downside risk |
| 0.5-1.0 | Fair—modest compensation for downside |
| <0.5 | Poor—insufficient return for losses taken |
Sharpe vs. Sortino: Side-by-Side Comparison
| Property Type | Sharpe Ratio | Sortino Ratio | Interpretation |
|---|---|---|---|
| MHC | 0.95 | 1.35 | Minimal downside; Sortino reveals true strength |
| Self-Storage | 0.68 | 0.89 | High upside vol lowers Sharpe; Sortino credits stability |
| Industrial | 0.72 | 0.98 | Recent surge creates upside vol |
| Multifamily | 0.52 | 0.61 | Cyclical; similar ratios indicate balanced vol |
| Retail | 0.18 | 0.22 | Weak performance both directions |
| Office | -0.31 | -0.42 | Negative returns; both metrics reflect losses |
MHC's 42% Higher Sortino (1.35 vs. 0.95)
Reveals that almost all its volatility is desirable upside variation, not harmful downside risk. Notice how Sortino Ratios are consistently higher than Sharpe Ratios for quality assets. This occurs because real estate typically experiences more upside volatility (occasional strong years) than extreme downside events.
Why Sortino Favors Real Assets
Quality real estate (especially MHC and industrial) tends to have low downside deviation due to:
- Essential demand that persists through downturns
- Long lease terms providing income stability
- Gradual cash flow adjustments vs. sudden stock price gaps
Unlike stocks that can gap down 20% overnight on earnings misses, real estate cash flows decline gradually if at all. This structural advantage causes Sortino Ratios to exceed Sharpe Ratios significantly—a sign that real estate's risk profile is more investor-friendly than total volatility suggests.
Where to Find This on Our Site
See Sortino Ratio analysis on our Research & Market Insights page, featuring:
- Performance Ratios charts including Sortino Ratio comparisons
- Risk-adjusted performance analysis by asset class
- Interactive ratio toggles (Sharpe, Sortino, Treynor)
Related Terms
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