Sortino Ratio Calculator
Calculate the Sortino ratio — a risk-adjusted return metric that only penalizes downside volatility, unlike the Sharpe ratio.
The Sortino Ratio is a risk-adjusted performance metric that measures how much return you earn per unit of downside risk — the volatility that actually hurts you. It was developed by Frank Sortino in 1994 as an improvement on the Sharpe Ratio.
Formula:
Sortino Ratio = (Average Return − Target Return) / Downside Deviation
Variable definitions:
- Average Return = Mean periodic return over the measurement window
- Target Return (MAR) = Minimum Acceptable Return — often set to the risk-free rate (e.g., current T-bill yield), or simply 0%
- Downside Deviation = Standard deviation of returns below the target only — upside volatility is ignored entirely
Step-by-step calculation:
- Collect your series of periodic returns (daily, weekly, or monthly)
- For each period, calculate:
Shortfall = min(Return − Target, 0) - Square each shortfall and average them
- Take the square root → this is your Downside Deviation
- Divide excess return by Downside Deviation
Interpretation guide:
| Sortino Ratio | Interpretation |
|---|---|
| Below 0 | Strategy is not meeting target return |
| 0.0 – 1.0 | Poor to adequate — high downside risk relative to return |
| 1.0 – 2.0 | Good — respectable risk-adjusted performance |
| 2.0 – 3.0 | Very good — strong downside-adjusted returns |
| 3.0+ | Excellent — elite performance |
Sortino vs. Sharpe — the key difference: The Sharpe Ratio penalizes all volatility equally, whether it comes from big gains or big losses. A strategy with occasional large wins (positive skew) will look worse on Sharpe than it deserves. The Sortino Ratio ignores upside volatility — only punishing what actually matters to investors: losing months.
Worked example: Strategy returns: +5%, +8%, −2%, +6%, −1%, +9%, +4% Target return: 0%
Downside returns: −2% and −1% Downside deviation = √[(0.02² + 0.01²) / 7] = 0.009 (0.9%) Average monthly return = 29% / 7 = 4.14% Sortino = 4.14% / 0.9% = 4.6 → Excellent
Practical note: Sortino ratios are sensitive to the choice of target return and measurement period. Always compare Sortino ratios calculated using the same parameters and time periods.