Sortino Ratio Calculator
Calculate Sortino ratio from portfolio returns and a target return.
Penalizes only downside risk — a refinement of the Sharpe ratio for skewed return profiles.
Sortino Ratio
The Sortino ratio is a refinement of the Sharpe ratio that penalizes only downside volatility. For most investors, upside surprises are not “risk.” Only losses are. Sortino addresses this by replacing standard deviation with downside deviation: the standard deviation of only the returns below a target.
Formula
Sortino = (R_p − T) / DD
Where:
- R_p = average portfolio return (annualized)
- T = target return (often the risk-free rate, but can be any minimum acceptable return)
- DD = downside deviation = √( Σ min(0, Rᵢ − T)² / N )
The downside deviation is the root-mean-square of negative excess returns only; positive returns contribute zero.
Worked Example
A portfolio with monthly returns 3%, 5%, −2%, 1%, −4%, 2%, 6%, −1%, 0%, 3%, target = 0%:
- Average R = 1.3%
- Below-target returns: −2%, −4%, −1%, treating zero/positive as zero
- DD = √((4 + 16 + 1) / 10) = √(2.1) = 1.45%
- Sortino = (1.3 − 0) / 1.45 = 0.90
For comparison, the Sharpe ratio uses all deviations (including the upside), which would understate the portfolio’s quality if returns are positively skewed.
Sortino vs Sharpe
| Metric | Risk Measure | Best For |
|---|---|---|
| Sharpe | Total volatility (σ) | Symmetric return distributions |
| Sortino | Downside-only deviation (DD) | Skewed, asymmetric returns |
| Sterling | Average drawdown | Trend-following strategies |
| Calmar | Maximum drawdown | Hedge fund, drawdown-sensitive investors |
If a strategy has positive skew (small frequent losses, occasional huge wins), typical of trend-following or insurance writing, Sortino will rate it more favorably than Sharpe.
Interpreting the Number
| Sortino | Interpretation |
|---|---|
| < 0 | Returns below target, losing money |
| 0–1 | Sub-par |
| 1–2 | Acceptable |
| 2–3 | Good |
| > 3 | Excellent (or possible data issue) |
These thresholds are rough; context matters. A market-neutral hedge fund target of 2+ is typical; a long-only equity fund averaging 1+ is reasonable.
Choosing the Target Return
| Target choice | When to use |
|---|---|
| Risk-free rate (T-bills) | Comparing to Sharpe’s reference |
| 0% | “Did I lose money?” simple test |
| Inflation rate | Real-return preservation |
| Liability return | Pension or insurance liabilities |
| Benchmark return | Outperformance metric |
The Sortino ratio is often computed against multiple targets to show its sensitivity.
Caveats
| Pitfall | What to Watch |
|---|---|
| Few data points | Need ≥ 30 periods for stability |
| Outliers | A single huge drawdown dominates DD |
| Target choice | Subjective; affects the result |
| Time scaling | Annualize numerator and denominator together |
| Distribution assumption | Like Sharpe, assumes returns are roughly stable |
The Sortino ratio is not directly comparable across portfolios with different targets. Always use the same T when ranking strategies.
History
Brian M. Rom and Frank A. Sortino introduced the ratio in 1991 to address the limitations of Sharpe for downside-averse investors. It has become the standard metric in the hedge fund and post-modern portfolio theory community.
How we build and check this calculator
This calculator runs entirely in your browser, so the numbers you enter stay on your device. The math behind it is written by hand and tested against worked examples and standard references before the page goes live.
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