# Sortino Ratio Calculator

The Sortino Ratio is a modification of the Sharpe Ratio that only considers downside risk. It is used to measure the risk-adjusted return of an investment, taking into account the negative deviation from a required return rather than the overall volatility. This makes the Sortino Ratio a more accurate measure of performance for investments that are sensitive to downside risk.

### Formula

The formula for calculating the Sortino Ratio is:

Sortino Ratio (SR) = (Average Return (AR) − Required Return (RR)) / Target Downside Deviation (TD)

Where:

**AR**= Average Return of the investment**RR**= Required Return or the minimum acceptable return**TD**= Target Downside Deviation, which measures the negative deviation from the required return

### How to Use

- Enter the
**average return**of the investment in the first input field. - Enter the
**required return**(the minimum acceptable return) in the second field. - Enter the
**target downside deviation**in the third field. - Click the “Calculate” button, and the Sortino Ratio will be displayed in the result field.

### Example

Suppose an investment has an average return of 12%, a required return of 5%, and a target downside deviation of 8%. Using the formula:

Sortino Ratio = (12% − 5%) / 8%

Sortino Ratio = 7% / 8%

Sortino Ratio = 0.875

Thus, the Sortino Ratio for this investment is 0.875, indicating a moderately risk-adjusted return.

### FAQs

**What is the Sortino Ratio?**

The Sortino Ratio is a financial metric that measures the risk-adjusted return of an investment by focusing only on downside risk rather than overall volatility.**How is the Sortino Ratio different from the Sharpe Ratio?**

While the Sharpe Ratio considers both upside and downside volatility, the Sortino Ratio focuses only on downside volatility, making it more useful when downside risk is the main concern.**Why is the Sortino Ratio important?**

It helps investors evaluate performance by isolating the downside risk, which is particularly important for those who are more risk-averse and concerned with avoiding losses.**What is the ideal value for the Sortino Ratio?**

A higher Sortino Ratio is preferable, as it indicates that the investment is providing higher returns per unit of downside risk.**Can the Sortino Ratio be negative?**

Yes, a negative Sortino Ratio indicates that the investment is not generating sufficient returns to cover the required return, given the downside risk.**What is downside deviation?**

Downside deviation measures the deviation of the investment’s returns below a required or target return, focusing only on the negative performance.**Is a higher or lower Sortino Ratio better?**

A higher Sortino Ratio is better, as it signifies that the investment is generating higher returns relative to the downside risk.**What is required return in the Sortino Ratio?**

The required return is the minimum acceptable return an investor expects from an investment. It’s used as a benchmark for calculating downside risk.**When should I use the Sortino Ratio over the Sharpe Ratio?**

The Sortino Ratio is preferred when you are primarily concerned with downside risk rather than overall volatility.**Can I use the Sortino Ratio for any investment?**

Yes, the Sortino Ratio can be used for any investment, especially those that experience significant downside risk.**How do I calculate target downside deviation?**

Target downside deviation is calculated by measuring the negative deviation of the investment’s returns below the required return over a given period.**Is the Sortino Ratio better for long-term or short-term investments?**

The Sortino Ratio is useful for both long-term and short-term investments but is particularly valuable for investments where downside risk needs to be managed closely.**Can the Sortino Ratio help in portfolio optimization?**

Yes, it can help in constructing portfolios by selecting investments that offer the best risk-adjusted returns based on downside risk.**How does volatility affect the Sortino Ratio?**

The Sortino Ratio focuses on downside volatility rather than overall volatility, making it more relevant for risk-averse investors.**What does a Sortino Ratio of 1 mean?**

A Sortino Ratio of 1 means that the investment’s returns are equal to its downside risk, which is considered a neutral result.**What are the limitations of the Sortino Ratio?**

The Sortino Ratio does not account for upside volatility, so it may undervalue investments that experience high positive performance.**What is a good Sortino Ratio for a stock portfolio?**

A Sortino Ratio above 1 is generally considered good, while a ratio above 2 is considered excellent.**Can I use the Sortino Ratio to compare different investments?**

Yes, the Sortino Ratio is a useful tool for comparing different investments based on their risk-adjusted returns.**How is the Sortino Ratio used in performance evaluation?**

It helps investors assess whether an investment is providing adequate returns for the amount of downside risk it carries.**What types of investors benefit most from the Sortino Ratio?**

Risk-averse investors and those concerned with minimizing losses can benefit most from using the Sortino Ratio.

### Conclusion

The Sortino Ratio is a powerful tool for evaluating risk-adjusted returns, particularly when downside risk is the primary concern. By focusing only on negative volatility, the Sortino Ratio provides a clearer picture of how well an investment performs relative to the risk of loss. Use this calculator to quickly determine the Sortino Ratio for any investment and make better-informed decisions when assessing potential risks and returns.