Sortino Ratio Calculator
Calculate the Sortino ratio to measure risk-adjusted returns focusing only on downside volatility. Unlike the Sharpe ratio, the Sortino ratio only considers harmful volatility (losses) rather than total volatility.
Sortino Ratio Results
Risk Analysis
Sortino Ratio Benchmarks
Excellent: > 2.0
Good: 1.0 - 2.0
Fair: 0.5 - 1.0
Poor: < 0.5
Note: Higher is better
Understanding the Sortino Ratio
The Sortino ratio, developed by Frank A. Sortino, is a variation of the Sharpe ratio that only considers downside volatility (harmful volatility) rather than total volatility. It focuses on the risk of losses rather than the volatility of gains.
Sortino Ratio Formula
The Sortino ratio is calculated as:
Sortino Ratio = (R_p - R_t) ÷ s_d
Where: R_p = portfolio return, R_t = target return, s_d = downside deviation
Key Differences from Sharpe Ratio
| Aspect | Sharpe Ratio | Sortino Ratio |
|---|---|---|
| Risk Measure | Total volatility | Downside deviation only |
| Upside Volatility | Penalized | Ignored (rewarded) |
| Focus | All volatility | Harmful volatility |
| Investor Type | Risk-neutral | Loss-averse |
Interpreting Sortino Ratios
| Sortino Ratio | Performance Level | Interpretation |
|---|---|---|
| > 2.0 | Excellent | Very good downside risk management |
| 1.0 - 2.0 | Good | Acceptable downside protection |
| 0.5 - 1.0 | Fair | Moderate downside risk |
| < 0.5 | Poor | High downside volatility |
Calculating Downside Deviation
Downside deviation is the standard deviation of negative returns (returns below the target or minimum acceptable return).
Downside Deviation Formula:
s_d = v[S(R_i - R_t)² ÷ n] (for R_i < R_t)
Where: R_i = individual return, R_t = target return, n = number of downside periods
Applications
- Risk-Averse Investors: Better measure for loss-averse investors
- Hedge Funds: Focus on downside protection
- Pension Funds: Emphasis on capital preservation
- Portfolio Optimization: Select assets with better downside protection
- Performance Evaluation: Assess manager skill in managing losses
Advantages Over Sharpe Ratio
- Relevant Risk: Only considers harmful volatility
- Investor Preferences: Aligns with loss aversion
- Performance Focus: Rewards upside without penalty
- Practical Application: Better for real-world decision making
- Risk Management: Focuses on protecting capital
Limitations
- Target Selection: Choice of target return affects results
- Data Requirements: Needs sufficient return data
- Time Period: Results vary with different horizons
- Market Conditions: Performance depends on market environment
- Single Benchmark: Uses single target rather than distribution
Sortino Ratio in Practice
The Sortino ratio is particularly useful for investors who are more concerned about losses than gains. It's commonly used by institutional investors and hedge funds that prioritize capital preservation.
- Conservative Portfolios: Often have higher Sortino ratios
- Growth Portfolios: May have lower Sortino ratios due to volatility
- Hedge Strategies: Designed to improve Sortino ratios
- Retirement Accounts: Useful for risk-averse retirement planning
Tip: The Sortino ratio is more appropriate than the Sharpe ratio for investors who are primarily concerned about downside risk. Use it when evaluating investments where capital preservation is more important than maximizing upside potential.