Sortino Ratio Calculator

How to use this calculator

Enter the Portfolio Return (annual %), the Minimum Acceptable Return (MAR) (often the risk-free rate) and the Downside Deviation (the standard deviation of only the returns that fall below the MAR).

The Sortino ratio = Excess Return / Downside Deviation

The Sortino ratio formula

Where:

• Rp = Portfolio return
• MAR = Minimum Acceptable Return (target rate; often the risk-free rate)
• Downside Deviation = Standard deviation of returns below MAR

Downside deviation formula:

For each period: if Ri < MAR, include (Ri − MAR)² in the sum. If Ri ≥ MAR, include 0. Average the squared shortfalls, then take the square root.

This means months with big gains contribute zero to downside deviation; they don’t penalize the Sortino ratio the way they penalize the Sharpe ratio.

When the Sortino ratio tells a different story than the Sharpe ratio

For strategies with symmetric, normally distributed returns, Sortino ≈ Sharpe × √2 (roughly 1.41×). For strategies with positively skewed returns (frequent small losses, occasional large gains), Sortino > Sharpe × √2.

Example: Two funds with the same average return

Fund	Annual Return	MAR	Total SD	Downside SD	Sharpe	Sortino
Fund A (symmetric)	12%	5%	15%	10.6%	0.47	0.66
Fund B (positively skewed)	12%	5%	18%	8%	0.39	0.88
Fund C (negatively skewed)	12%	5%	10%	14%	0.70	0.50

Fund C looks best under Sharpe (0.70) but worst under Sortino (0.50). It has low total volatility but frequent negative months, suggesting a strategy like writing covered calls or selling volatility, earning steady income with occasional large losses. Sortino correctly identifies the downside-heavy risk profile.

Fund B looks worst under Sharpe but best under Sortino, a positively skewed strategy that has big occasional gains dragging up total volatility but not downside volatility.

Choosing the right MAR (Minimum Acceptable Return)

The MAR defines what counts as “harmful.” Different choices produce different Sortino ratios:

MAR Choice	What It Means	When to Use
Risk-free rate (T-bill)	Any return below T-bills is harmful	Most common; standard comparison
0%	Any loss is harmful	Absolute return / capital preservation mandates
Inflation rate	Any real loss is harmful	Retirees worried about purchasing power
Benchmark return	Any underperformance is harmful	Relative return mandate vs. an index
Target return	Any miss vs. a goal rate	Liability-driven investing

Impact on Sortino ratio of the same fund at different MARs:

Fund: 14% return, various downside deviations by MAR

MAR	Downside SD	Sortino Ratio
0%	4.5%	3.11
5%	7.2%	1.25
8%	9.8%	0.61
12%	13.1%	0.15

The Sortino ratio is only comparable across funds when the same MAR is used. Mixing MARs makes the numbers meaningless.

How to calculate downside deviation

Step-by-step with monthly returns:

Suppose monthly returns are: 2%, −3%, 5%, −1%, 4%, −6%, 3%, −2%, 7%, −4%, 1%, 8% MAR = 0% per month (risk-free rate ≈ 0% monthly for simplicity)

1. Identify negative months: −3%, −1%, −6%, −2%, −4%
2. Square each shortfall below 0: 0.0009, 0.0001, 0.0036, 0.0004, 0.0016
3. Sum of squared shortfalls: 0.0066
4. Divide by total periods (N = 12): 0.0066 / 12 = 0.00055
5. Take square root: 0.02345 per month
6. Annualize: 0.02345 × √12 = 8.12% annual downside deviation

Sortino ratio interpretation guide

Sortino Ratio	Interpretation
Below 0	Returns below MAR on a downside-risk-adjusted basis
0–0.5	Below average
0.5–1.0	Adequate
1.0–1.5	Good
1.5–2.0	Very good
Above 2.0	Excellent (verify data; rare at scale)

Because Sortino uses a smaller denominator than Sharpe (downside SD only vs. total SD), Sortino ratios are numerically higher for the same strategy. A “good” Sortino of 1.0 corresponds roughly to a “good” Sharpe of 0.7 for a strategy with symmetric returns.

The bottom line

The Sortino ratio is the Sharpe ratio refined: it distinguishes between good volatility (big gains) and bad volatility (losses below target). For most equity strategies, the difference is modest. For asymmetric strategies, it is significant.

Use Sortino when:

• Your strategy deliberately generates positively skewed returns (momentum, options buying, trend-following)
• You want to evaluate downside protection quality specifically
• You are comparing strategies that have different return distribution shapes

Use Sharpe when making general comparisons across diverse strategies with approximately symmetric return distributions.

Both metrics are more informative when compared against a passive benchmark than when used in isolation.