Sortino Ratio Calculator

Both compare a strategy's excess return over a target to its volatility, but they define volatility differently. The Sharpe ratio uses standard deviation of all returns, so a big upside month counts as 'risk' just as much as a big drawdown does. The Sortino ratio (Frank Sortino, 1991 and refined in 1994) uses only the standard deviation of returns that fall below the target, on the argument that investors do not actually dislike upside surprises. For a perfectly symmetric return series Sortino and Sharpe converge, but for any skewed or asymmetric strategy (most option-selling, long-volatility, trend-following, and concentrated equity books) Sortino tends to be 1.2x to 1.5x the Sharpe and is widely viewed as the fairer single-number score.

The target return, also called Minimum Acceptable Return (MAR), is the threshold below which a period is treated as a 'loss' for risk purposes. The two common choices are 0 (the strategy is judged on whether it makes money at all) and the risk-free rate (the strategy is judged on whether it beats a Treasury bill, matching the Sharpe convention). Sortino's original papers actually recommended using the investor's personal required return (e.g. 6% for a retirement plan whose liabilities grow at 6% a year), since that is the rate at which falling short is genuinely painful. For monthly data and a roughly 5% annual T-bill yield, a target of about 0.4% per month is the closest equivalent.

Sortino ratios computed from raw periodic returns are not comparable across frequencies. A monthly Sortino of 0.3 is not worse than a daily Sortino of 0.3; it is measured over a different interval. The calculator annualizes return using the selected periods per year and scales downside deviation by the square root of that count. Compare strategies only when the frequency, return definition, and target return are consistent.

In long-only equity, anything above 2 is excellent and anything above 3 is exceptional and should be stress-tested for survivorship bias before trusting it. The S&P 500's long-run Sortino sits near 0.6 to 0.9 depending on the window and target. Typical hedge funds report 0.5 to 1.5 (BarclayHedge and HFR aggregates). Star quant funds such as Renaissance's Medallion have reported Sortinos above 5, but those are private return series with selection bias and survivorship effects, and are not realistic benchmarks. For a personal portfolio, beating 1 is a meaningful threshold; beating 1.5 puts you in roughly the top quartile of active managers.

Use Sortino instead of Sharpe whenever the strategy's return distribution is asymmetric (which is almost always). It is the standard score for hedge fund evaluation, trend-following CTAs, options strategies (where covered calls and cash-secured puts truncate upside while leaving downside intact), and any private fund report where the manager wants credit for converting volatility into asymmetric upside. It is less useful for two cases: very short return histories (under 30 observations, where downside deviation is noisy and a few unlucky months distort the score), and strategies with zero or near-zero observations below the target (Sortino approaches infinity and stops being meaningful; the calculator flags this and asks you to lower the target or add data).