Why penalise losses but not gains
Standard deviation, the risk measure behind the Sharpe ratio, treats every move away from the average return as risk — including the upside moves that investors are actively hoping for. That makes a volatile but consistently winning strategy look just as “risky” as a volatile losing one. The Sortino ratio fixes this by replacing total volatility withdownside deviation: it measures only how far returns fall below a chosen threshold, the minimum acceptable return. The result is a number that rewards return per unit of harmful risk, and ignores the windfalls entirely.
The Sortino ratio formula
Sortino = ( R − MAR ) / σdownside
σdownside = √( mean( min(Rt − MAR, 0)² ) )
where R = the mean (average) return of the series,MAR = the minimum acceptable return — the threshold below which a period counts as a loss — and σdownside is the downside deviation. Note that periods where the return is at or above the MAR contribute zero to the sum, so only shortfalls move the denominator.
What makes this calculator different
- It takes a full series of returns. Paste in every period rather than a single summary number, so the downside deviation is computed from the actual distribution of outcomes — not an assumed shape.
- It computes downside deviation explicitly. Each period’s shortfall below your minimum acceptable return is squared, averaged, and rooted, so you can see exactly which returns drove the risk figure.
- It shows the Sharpe ratio side by side. The same data is run through total standard deviation as well, making the difference between the two measures explicit instead of theoretical — see theSharpe ratio calculatorfor that measure on its own.
Frequently asked questions
What is the Sortino ratio?+
The Sortino ratio is a measure of risk-adjusted return that compares an investment’s excess return to the volatility of its losses alone. It is defined as (R − MAR) ÷ σ_downside, where R is the mean return, MAR is the minimum acceptable return, and σ_downside is the downside deviation. By dividing only by the size of bad outcomes, it answers a focused question: how much return did you earn per unit of harmful risk? A higher Sortino ratio means more reward for each unit of downside the strategy actually exposed you to.
How does the Sortino ratio differ from the Sharpe ratio?+
Both ratios divide excess return by a measure of risk, but they define risk differently. The Sharpe ratio uses total standard deviation, which treats every deviation from the average — up or down — as risk, so a string of large gains can actually lower it. The Sortino ratio replaces that denominator with downside deviation, counting only returns that fall below the minimum acceptable return. The result is that Sortino stops penalising the very upside volatility investors are hoping for, and rewards strategies that produce big wins without big losses.
What is downside deviation and the minimum acceptable return (MAR)?+
The minimum acceptable return (MAR) is the threshold below which a return counts as a bad outcome — often set to zero, the risk-free rate, or a target you cannot afford to miss. Downside deviation measures how far, and how often, returns fall beneath that MAR. It is computed by taking each period’s shortfall below the MAR, squaring only those shortfalls (returns above the MAR contribute zero), averaging them, and taking the square root. Because gains never enter the calculation, downside deviation captures harmful variability rather than total variability.
When is the Sortino ratio more appropriate than the Sharpe ratio?+
Sortino is better suited to strategies whose returns are asymmetric or skewed rather than neatly symmetric. Many real-world payoffs — options-based income, trend-following, or anything with occasional large gains — have a distribution where upside and downside are not mirror images. Standard deviation treats those two sides identically, so Sharpe can understate a manager who delivers frequent modest losses but rare enormous wins. When the shape of the return distribution matters, and especially when you care specifically about avoiding losses below a target, Sortino gives a fairer picture.
What is a good Sortino ratio?+
As a rough heuristic, higher is better, and a Sortino ratio around 2 or above is often considered strong, while values near or below zero indicate the strategy failed to beat its minimum acceptable return per unit of downside risk. These are not hard standards, though. The ratio depends heavily on the chosen MAR, the time period, and how returns are sampled, so a number is only meaningful relative to a comparable benchmark or peer measured the same way. Treat any threshold as a loose guide rather than a pass-or-fail line.
Disclaimer: This calculator is foreducation and illustration only. The Sortino ratio is a backward-looking statistic that depends on the returns and minimum acceptable return you supply, and past performance does not predict future results. Nothing here is investment, tax, or trading advice.