Sortino Ratio Calculator

Understanding the Sortino ratio calculator — concept and principle

The Sortino ratio is a risk-adjusted performance measure that, unlike the Sharpe ratio, counts only harmful volatility: returns below a target. Investors use it to compare strategies whose ups and downs are not symmetric, or whenever they care mainly about losses. Enter the annual return, the target or risk-free return and the downside deviation to get the ratio.

How it is calculated

• Excess return = portfolio return − target return.
• Sortino ratio = excess return ÷ downside deviation.
• Downside deviation = √(average of min(0, Rₜ − target)²) over all periods, annualised.

Use the same target in both the excess return and the downside deviation, and the same period and frequency for all inputs.

The principle

Standard deviation penalises a fund for large gains just as much as for large losses, which few investors see as risk. Frank Sortino and colleagues proposed measuring only the shortfall below a minimum acceptable return. Periods above the target contribute zero to the downside deviation, and periods below it contribute their squared shortfall. A strategy with frequent small gains and occasional large losses will therefore look worse on Sortino than on Sharpe, while one with large upside bursts will look better.

Worked example

Default inputs: return 10%, target 4%, downside deviation 9%.

1. Excess return: 10% − 4% = 6%.
2. Sortino ratio: 6 ÷ 9 = 0.667, shown as 0.67.

So the portfolio earned 0.67 percentage points of excess return per point of downside risk.

How to read the result

Higher is better. Because downside deviation is usually smaller than total volatility, Sortino ratios tend to be higher than Sharpe ratios for the same portfolio, so never compare a Sortino value with a Sharpe value. Compare funds only when their Sortino ratios use the same target, period and data frequency. A negative value means the return fell short of the target.

Common mistakes

• Using total standard deviation instead of downside deviation.
• Using different targets in the numerator and denominator.
• Computing downside deviation only from the losing periods instead of all periods.
• Drawing conclusions from too few data points; downside estimates need many periods.

Frequently asked questions

Sortino or Sharpe?

Sortino suits investors focused on losses or strategies with skewed returns; Sharpe is the more common standard.

What target should I use?

Often the risk-free rate, zero or your required return; state which one you used.

What is a good Sortino ratio?

There is no fixed threshold; compare with similar funds measured the same way.

Sources: Sortino, F. A. and Price, L. N., "Performance Measurement in a Downside Risk Framework", Journal of Investing (1994) · CFA Institute, CFA Program Curriculum (risk-adjusted performance measures)