Sortino Ratio Calculator
Analyze risk-adjusted returns focusing only on downside deviation and negative volatility
Calculate Sortino Ratio
Historical average return of the investment
Standard deviation of negative returns only
Current risk-free rate (e.g., 3-month Treasury bill)
Sortino Ratio Results
Calculation Details
Acceptable but room for improvement
Annualized Values (assuming monthly data)
Real Example: Apple vs Microsoft
Apple (AAPL) - 20 Year Analysis
Average Monthly Return: 3.11%
Risk-Free Rate: 0.13% (3-month Treasury)
Downside Standard Deviation: 4.891%
Calculation: (3.11% - 0.13%) / 4.891% = 0.609
Microsoft (MSFT) - 20 Year Analysis
Average Monthly Return: 1.35%
Risk-Free Rate: 0.13% (3-month Treasury)
Downside Standard Deviation: 3.489%
Calculation: (1.35% - 0.13%) / 3.489% = 0.350
Result: Apple shows better risk-adjusted returns despite higher downside risk
Sortino Ratio Scale
Higher ratios indicate better risk-adjusted returns
Sortino vs Sharpe Ratio
Sortino only considers downside risk (negative returns)
Better for asymmetric return distributions
More relevant for actual investor concerns
Focuses on harmful volatility only
Generally higher values than Sharpe ratio
Understanding the Sortino Ratio
What is the Sortino Ratio?
The Sortino ratio is a risk-adjusted return measure that differentiates harmful volatility from total volatility by using the asset's standard deviation of negative returns only. Unlike the Sharpe ratio, it focuses specifically on downside risk.
Why Use Sortino Ratio?
- •More accurate for asymmetric return distributions
- •Focuses only on harmful volatility
- •Better reflects investor preferences
- •Superior for comparing hedge funds and alternatives
Sortino Ratio Formula
Sortino Ratio = (Ra - Rf) / STD
(Average Return - Risk-Free Rate) / Downside Deviation
- Ra: Average return of the asset
- Rf: Risk-free rate (e.g., Treasury bills)
- STD: Standard deviation of negative returns only
Key Difference: Sortino ratio replaces total volatility with downside deviation, providing a more realistic risk assessment.
Practical Applications
Portfolio Management
- • Asset allocation decisions
- • Manager selection and evaluation
- • Performance attribution analysis
- • Risk-adjusted benchmarking
Alternative Investments
- • Hedge fund evaluation
- • Private equity assessment
- • Real estate analysis
- • Commodity investment review
Risk Management
- • Downside protection strategies
- • Tail risk assessment
- • Stress testing scenarios
- • Value-at-Risk calculations
Calculation Steps
1️⃣ Data Collection
Gather historical returns (daily, monthly, or quarterly) for at least 3-5 years of data.
2️⃣ Calculate Average Return
Compute the arithmetic mean of all historical returns to get Ra.
3️⃣ Identify Negative Returns
Filter out only the periods with negative returns, replace positive returns with zero.
4️⃣ Compute Downside Deviation
Calculate standard deviation of the negative returns dataset to get STD.