How to use the Sortino ratio calculator
From a return series does the full calculation:
- Paste the returns in percent, oldest first, one per line or separated by commas. The example holds the same 36 monthly returns as our Sharpe ratio calculator, so you can compare the two pages directly.
- Choose the frequency of the returns. It sets how the target is converted to a per-period rate and how the ratio is annualized.
- Set the target return, also called the minimum acceptable return (MAR), as an annual rate. Every period that earns less counts as downside.
- Enter the risk-free rate. It is used only for the Sharpe ratio shown next to the Sortino ratio.
From annual figures is the shortcut when a report already gives the annual return and downside deviation. Add the volatility if you want the Sharpe ratio alongside.
The Sortino ratio formula
Annualized Sortino = Sortino per period × √Nri are the n returns. Returns above the target contribute zero; returns below it contribute their squared shortfall. N is the number of periods in a year (12 for monthly data), and the annual target is converted with T = (1 + MAR)1/N − 1.
A worked example
The 36 monthly returns in the example are measured against a 4% annual target, which works out to 0.33% a month. Of the 36 months, 11 fell short of it. Squaring each shortfall, averaging over all 36 months and taking the square root gives a downside deviation of 1.35% a month, or 4.68% annualized.
The returns beat the target by 6.54% a year on average, so the annualized Sortino ratio is 1.40. On the same data, with a 4% risk-free rate, the Sharpe ratio is 0.90.
Sortino vs Sharpe on the same returns
| Measure | Example | What it counts as risk |
|---|---|---|
| Sortino ratio (target 4%) | 1.40 | Only shortfalls below the target |
| Sortino ratio (target 0%) | 2.53 | Only losing months |
| Sharpe ratio | 0.90 | Every deviation from the average, up or down |
| Downside deviation | 4.68% | Shortfalls below the target, annualized |
| Volatility | 7.24% | All deviations from the average, annualized |
The gap between the two ratios says something about the shape of the returns. When gains are larger or more frequent than losses, volatility is inflated by good months and the Sortino ratio pulls ahead. When a strategy has many small gains and occasional sharp losses, as option selling often does, downside deviation is a large share of volatility and the Sortino ratio adds little to the Sharpe ratio. For those strategies the maximum drawdown and the worst months tell you more.
Definition choices that change the number
Published Sortino ratios are not always computed the same way, so check these before comparing figures from different sources:
- Dividing by all periods or only the losing ones. The original definition, used here, averages the squared shortfalls over every period, with zero for periods above the target. Some software divides only by the number of below-target periods, which gives a larger downside deviation and a smaller ratio. The calculator shows that version too: 0.77 for the example, against 1.40.
- The target. Raising the target adds more periods to the downside and lowers the numerator at the same time, so the ratio falls quickly. Moving the example’s target from 0% to 4% takes it from 2.53 to 1.40.
- Standard deviation of the negative returns. A common spreadsheet shortcut takes STDEV of only the negative returns. That measures how spread out the losses are around their own average, not how far they fall below the target, and it can produce a small number even when every loss is large. It is not downside deviation.
- Annualization. Multiplying by √N assumes returns are independent from one period to the next, the same assumption the Sharpe ratio makes. Computing downside deviation directly from annual returns gives a different, usually noisier, figure.
How reliable is the ratio?
Downside deviation is estimated from the below-target periods only, and there are fewer of them than there are periods in total. In the example, 11 of 36 months carry all the information about downside risk. With short histories, a single bad month moves the ratio a lot, and a strategy that has not yet had a bad period can show a Sortino ratio that is very high but means little. The calculator warns when fewer than six returns fall below the target.
What this calculator does not include
The calculator treats the returns as given: it does not deduct fees or taxes, adjust for deposits or withdrawals, or correct for smoothed prices in illiquid assets, which understate downside risk. It assumes a constant target and risk-free rate across the whole period. And like every ratio built on past returns, it describes the sample, not the future: the worst losses may not be in the data yet. Look at the maximum drawdown and the Calmar ratio to see the size of the worst decline.