Sortino ratio calculator

A Sharpe ratio divides by total volatility, which treats a surprise gain as a risk. The Sortino ratio divides by downside deviation instead, so upside moves are excluded from the penalty entirely.

That is the whole difference between the two, and it matters most for strategies whose returns are not symmetric. An option selling strategy with many small gains and rare large losses looks very different under the two measures, because one of them counts the small gains as risk and the other does not.

$T$ can be the risk free rate, in which case the ratio is closest to Sharpe, or it can be a minimum acceptable return: the number below which an outcome counts as failure. The 3 percent here is that kind of target.

Changing the target changes both the numerator and the denominator, because it moves the line that decides which returns count as downside. Two Sortino ratios computed against different targets are not comparable, which is why the target belongs next to any quoted figure.

The ratio is excess return per unit of downside risk. At 0.875 the portfolio earned slightly less excess return than it took downside deviation. The second example, 12 percent against a 2 percent target with 10 percent downside deviation, gives exactly 1: one point of excess return for each point of downside risk.

Higher is better, and there is no threshold that makes a strategy good. Like every risk adjusted measure, it is a comparison tool between alternatives measured the same way over the same period.

One return, one target, one downside deviation, over one period. Downside deviation itself has to be computed from the return series before it reaches this formula, and the period used for it should match the period the return covers. Sharpe ratio is the total volatility version, and standard deviation of returns is the underlying measure. This is educational material, not financial advice.