Sortino Ratio Calculator

Understanding the Sortino Ratio

The Sortino Ratio is a variation of the Sharpe Ratio that differentiates harmful volatility from total overall volatility. Instead of using total standard deviation, which penalizes both upside and downside volatility, the Sortino Ratio uses downside deviation. This makes it a particularly useful metric for evaluating the performance of hedge funds, alternative investments, and portfolios with skewed return distributions.

The mathematical formula for the Sortino Ratio is:

Where R_p is the expected or actual return of the portfolio, MAR is the Minimum Acceptable Return (or target return), and σ_d is the downside deviation.

By focusing exclusively on the negative deviation of returns below the minimum acceptable return, the Sortino Ratio gives a better picture of a portfolio's risk-adjusted performance when investors are primarily concerned with downside risk. A large, positive return variance (upside volatility) is usually welcomed by investors; penalizing a fund manager for it, as the Sharpe Ratio does, can sometimes be misleading. A higher Sortino Ratio means the investment is earning more return for every unit of bad risk it takes on.

Like the Sharpe Ratio, a higher Sortino number is better. A Sortino ratio of 2.0 or above is considered excellent. To compare how this metric contrasts with total volatility measures, visit our Sharpe Ratio Calculator. You can also explore position sizing based on statistical edges using our Hedge Fund Allocation Calculator.