Sortino Ratio Calculator

What Is the Sortino Ratio?

The Sortino ratio is a risk-adjusted performance metric that focuses only on downside risk. Instead of treating all volatility as bad, it separates harmful negative returns from harmless upside moves. This makes it particularly useful for investors who care more about drawdowns than about big positive surprises.

Where the Sharpe ratio divides excess return by total volatility, the Sortino ratio divides excess return by downside deviation — the volatility of returns that fall below a chosen target or risk-free rate. If a strategy delivers steady gains with only occasional mild losses, its Sortino ratio will usually look better than its Sharpe ratio. If a strategy has frequent or deep losses, the Sortino ratio will fall quickly.

This calculator helps you estimate the Sortino ratio from a series of percentage returns. You can work with daily, weekly, monthly, or annual data, supply an annual risk-free rate, and see both the per-period and annualized Sortino ratios alongside the downside deviation.

Sortino Ratio Formula

The basic idea behind the Sortino ratio is:

• Measure the average return of your portfolio or strategy.
• Measure how often and how severely returns fall below a chosen minimum acceptable return (MAR) or risk-free rate.
• Divide the excess return over that hurdle by the downside deviation.

In symbolic form, for a series of returns and a target return per period:

Where:

• R¯ is the average return per period.
• T is the target or hurdle return per period (often the risk-free rate or minimum acceptable return).
• The denominator is the downside deviation: the square root of the average of squared shortfalls (returns below the target).

In many practical applications, the target is set equal to the risk-free rate for the same period, and the numerator becomes the average excess return over the risk-free rate.

How This Calculator Handles Frequency and Risk-Free Rate

The input risk-free rate in the form is an annual percentage. The calculator converts that annual rate into an equivalent rate for the frequency of your data (daily, weekly, monthly, or annual). This ensures that the target return used in the Sortino formula is on the same time scale as your returns.

For example:

• If you select Monthly and enter an annual risk-free rate of 2.4%, the calculator converts 2.4% per year into a roughly 0.2% per month hurdle before computing downside deviations.
• If you select Daily, the same 2.4% per year is converted into a small daily rate (assuming a standard number of trading days per year, such as 252).

After computing the per-period Sortino ratio, the calculator also provides an annualized Sortino ratio. This is derived by scaling the per-period excess return and downside deviation to an annual horizon using your chosen frequency.

Using the Sortino Ratio Calculator

To use the calculator effectively, keep these points in mind:

• Returns format: Enter returns as percentages, separated by commas. For example: 2, -1.5, 3, 0.8 represents +2%, -1.5%, +3%, and +0.8%.
• Consistent frequency: All returns you paste must correspond to the same interval (all daily, all weekly, all monthly, or all annual). Then choose the matching frequency in the dropdown.
• Annual risk-free rate: Enter an annual percentage such as 2.4 for 2.4% per year. The calculator converts it to the appropriate per-period target automatically.
• Data length: For more stable estimates, it is better to have a longer history (for example, at least 30–60 observations). With very few returns, the Sortino ratio can be noisy and misleading.

The script converts your percentage inputs to decimals, computes the mean return, determines which observations are below the per-period hurdle, and uses only those shortfalls to calculate the downside deviation. It then reports:

• Per-period Sortino ratio
• Annualized Sortino ratio
• Downside deviation (in percentage terms)

Interpreting Sortino Ratio Results

The Sortino ratio is generally interpreted as “excess return earned per unit of downside risk.” Higher values typically indicate better risk-adjusted performance. However, there are no universal cutoffs that apply to every asset class or strategy. Context matters.

As very rough rules of thumb:

• Negative Sortino: On average, the strategy fails to beat the target or risk-free rate. This is usually unattractive unless there is some other specific strategic reason.
• Between 0 and 1: Modest compensation for downside risk. May be acceptable for conservative portfolios or in difficult market environments.
• Between 1 and 2: Often considered good risk-adjusted performance, depending on the asset class and leverage.
• Above 2: Frequently cited as excellent in many professional contexts, though it may not be sustainable over long horizons.

Because the Sortino ratio isolates downside risk, it is especially informative for strategies with asymmetric payoffs, such as options selling, structured products, or certain absolute-return funds. Two strategies with similar average returns and Sharpe ratios can have very different Sortino ratios if one of them experiences deeper or more frequent drawdowns.

Always interpret the number alongside other information: the time period covered, market regime, leverage used, and the economic intuition behind the strategy.

Worked Example

Suppose a portfolio produced the following monthly returns: 2%, -1%, 3%, and -0.5% over four months. Assume the annual risk-free rate is 2.4%.

Step 1: Convert the annual risk-free rate to monthly

If we assume simple proportional conversion for illustration, the monthly risk-free rate is:

2.4% / 12 = 0.2% per month.

So the per-period target is 0.2%.

Step 2: Compute the average monthly return

The four returns are: 2%, -1%, 3%, -0.5%.

The arithmetic mean is:

(2 + (-1) + 3 + (-0.5)) / 4 = 3.5 / 4 = 0.875% per month.

So .

Step 3: Identify downside returns

We compare each return to the 0.2% target:

• Month 1: 2% > 0.2% (no downside)
• Month 2: -1% < 0.2% (downside)
• Month 3: 3% > 0.2% (no downside)
• Month 4: -0.5% < 0.2% (downside)

For downside deviation, we use only the shortfalls, defined as :

• Month 1: min(2% - 0.2%, 0) = min(1.8%, 0) = 0
• Month 2: min(-1% - 0.2%, 0) = min(-1.2%, 0) = -1.2%
• Month 3: min(3% - 0.2%, 0) = min(2.8%, 0) = 0
• Month 4: min(-0.5% - 0.2%, 0) = min(-0.7%, 0) = -0.7%

Step 4: Compute downside deviation

Square the shortfalls (in decimal form) and average them:

• 0 becomes 0
• -1.2% = -0.012; squared: 0.000144
• 0 becomes 0
• -0.7% = -0.007; squared: 0.000049

Average over all 4 periods (some implementations divide by the number of total periods, not just downside periods):

(0 + 0.000144 + 0 + 0.000049) / 4 = 0.000193 / 4 = 0.00004825

Downside deviation is the square root of this average:

, or about 0.695% per month.

Step 5: Compute the Sortino ratio

Excess return over the target is:

, or 0.00675 in decimal form.

The Sortino ratio is then:

0.00675 / 0.00695 ≈ 0.97.

This means the strategy earned about 0.97 units of excess return for each unit of downside risk over this four-month sample. If we annualized both the returns and the downside deviation properly, we would obtain an annualized Sortino ratio that can be compared with other investments.

Sortino vs. Sharpe and Other Ratios

The Sortino ratio belongs to a family of risk-adjusted performance measures. Each uses a different definition of “risk” in the denominator. Choosing the right one depends on your investment style and the questions you are trying to answer.

In practice, many analysts look at several metrics together. For example, a strategy might have a decent Sharpe ratio but a poor Sortino ratio if its negative returns are concentrated in rare but severe drawdowns. Conversely, a strategy with skewed positive returns can have a strong Sortino ratio even if total volatility is high.

Key Assumptions and Limitations

Like all summary statistics, the Sortino ratio has important assumptions and limitations. You should be aware of them before making decisions based on the output of this calculator.

• Sample size: With too few observations, the Sortino ratio can be unstable and overly influenced by a small number of extreme returns. Longer histories usually give more reliable estimates.
• Choice of target or risk-free rate: Different targets can lead to different conclusions. Using a low risk-free rate versus a higher minimum acceptable return can materially change the ratio.
• Sensitivity to extreme negative returns: Because downside deviation squares shortfalls, a few very large negative returns can dominate the denominator and sharply reduce the Sortino ratio.
• Non-stationary returns: Financial return distributions can change over time. A strong historical Sortino ratio does not guarantee similar performance in the future.
• Ignoring path and liquidity: The Sortino ratio summarizes returns without capturing intra-period drawdowns, liquidity constraints, or transaction costs that investors actually experience.
• Not a standalone decision rule: While useful for comparison, the Sortino ratio should be combined with qualitative analysis, drawdown profiles, exposure concentrations, and your specific risk tolerance.

Finally, remember that past performance is not a reliable indicator of future results. Use the Sortino ratio as one informative input among many, not as a guarantee of future outcomes.