Sortino Ratio Calculator
Evaluate investment portfolio risk using the Sortino Ratio. Differentiates between harmful downside volatility and total volatility for accurate performance analysis.
About
The Sharpe Ratio treats all volatility equally. This is a flaw for investors who seek high-growth assets like cryptocurrencies or aggressive stocks. If an asset surges 20% in a day, Sharpe penalizes it for volatility. The Sortino Ratio fixes this by ignoring upside volatility. It focuses strictly on "Downside Deviation," measuring only the risks that hurt the portfolio value.
This metric is critical for asymmetric return profiles. A high Sortino ratio indicates that the investment is generating high returns per unit of bad risk. Investors use this to distinguish between volatile assets that are dangerous (downside prone) and volatile assets that are profitable (upside prone). The Minimum Acceptable Return (MAR) is typically set to 0% or the risk-free rate.
Formulas
The Sortino Ratio is calculated by subtracting the target return from the portfolio return and dividing by the downside deviation.
S = Rp − MARσd
Where MAR is the Minimum Acceptable Return.
Downside Deviation (σd):
σd = √1N N∑i=1 (min(0, Ri − MAR))2
Only returns falling below the MAR contribute to the deviation calculation. Returns above the threshold are treated as 0 variance.
Reference Data
| Metric | Sharpe Ratio | Sortino Ratio | Best Use Case |
|---|---|---|---|
| Volatility Source | Total Std Dev (Up & Down) | Downside Deviation (Down only) | - |
| Penalty | Penalizes unexpected gains | Ignores unexpected gains | - |
| Conservative Fund | Excellent | Good | Pension Funds |
| Crypto / Tech | Misleading (Often too low) | Accurate | Growth Portfolios |
| Hedge Funds | Standard | Preferred | Absolute Return |
| Option Strategies | Poor | Excellent | Call writing |