1. What is the Sortino Ratio?

The Sortino Ratio is a risk-adjusted return metric that measures the excess return per unit of downside risk. It improves upon the Sharpe Ratio by focusing only on harmful volatility (downside deviation) rather than total volatility.

2. How Does the Calculator Work?

The calculator uses the Sortino Ratio formula:

Where:

• \( \text{Return} \) — Investment return (decimal)
• \( \text{Risk Free} \) — Risk-free rate (decimal)
• \( \text{Downside SD} \) — Downside standard deviation (decimal)

Explanation: The ratio measures how much excess return you receive for each unit of bad volatility you endure. Higher values indicate better risk-adjusted returns.

3. Importance of Sortino Ratio

Details: The Sortino Ratio is particularly useful for evaluating investments where downside protection is important, such as retirement portfolios or hedge funds. It helps investors compare strategies with similar returns but different risk profiles.

4. Using the Calculator

Tips: Enter all values as decimals (e.g., 0.08 for 8%). The downside standard deviation must be greater than zero. Higher ratios indicate better risk-adjusted performance.

5. Frequently Asked Questions (FAQ)

Q1: What's a good Sortino Ratio?
A: Generally, a ratio above 2 is excellent, 1-2 is good, and below 1 may indicate insufficient compensation for downside risk.

Q2: How is Downside SD different from regular SD?
A: Downside SD only considers returns below a target (often risk-free rate), ignoring upside volatility that investors typically welcome.

Q3: When should I use Sortino vs Sharpe Ratio?
A: Use Sortino when you're primarily concerned about downside risk. Use Sharpe when total volatility matters.

Q4: What time period should I use for inputs?
A: Use consistent time periods (e.g., annual returns with annual downside SD). Typically 3-5 years of monthly data is used.

Q5: Can Sortino Ratio be negative?
A: Yes, if the return is less than the risk-free rate, indicating the investment underperformed the risk-free benchmark.