Sortino Ratio Calculator

1. What is the Sortino Ratio Calculator?

Definition: The Sortino Ratio Calculator computes the Sortino Ratio, a risk-adjusted performance metric that measures the return of an investment relative to its downside risk, focusing only on negative volatility.

Purpose: It helps investors assess the return of an investment per unit of downside risk, providing a more targeted measure than the Sharpe Ratio by ignoring upward volatility.

2. How Does the Calculator Work?

The calculator uses the following formula:

\( \text{SR} = \frac{\text{Ra} - \text{Rf}}{\text{STD}} \)

Where:

\( \text{SR} \): Sortino Ratio;
\( \text{Ra} \): Average Return on the Asset (% as decimal);
\( \text{Rf} \): Risk-Free Return (% as decimal);
\( \text{STD} \): Downside Standard Deviation (% as decimal).

Steps:

Enter the average return on the asset as a percentage.
Enter the risk-free return as a percentage.
Enter the downside standard deviation (negative volatility) as a percentage.
Calculate the Sortino Ratio by subtracting the risk-free return from the asset return and dividing by the downside standard deviation.
Display the result, formatted in scientific notation if the absolute value is less than 0.001, otherwise with 4 decimal places.

3. Importance of Sortino Ratio Calculation

Calculating the Sortino Ratio is essential for:

Downside Risk Focus: Emphasizes losses rather than total volatility, offering a refined risk assessment.
Investment Comparison: Allows comparison of investments based on downside risk performance.
Portfolio Management: Guides adjustments to minimize negative returns.

4. Using the Calculator

Example: Calculate the Sortino Ratio for an asset with an average return of 12%, a risk-free return of 3%, and a downside standard deviation of 10%:

\( \text{Ra} \): 12%;
\( \text{Rf} \): 3%;
\( \text{STD} \): 10%;
\( \text{SR} \): \( \frac{0.12 - 0.03}{0.10} = 0.9000 \).

5. Frequently Asked Questions (FAQ)

Q: How is the Sortino Ratio different from the Sharpe Ratio?
A: The Sortino Ratio focuses only on downside risk (negative returns), while the Sharpe Ratio considers total volatility.

Q: What is a good Sortino Ratio?
A: A Sortino Ratio above 2 is generally considered excellent, indicating strong returns relative to downside risk.

Q: How is downside standard deviation calculated?
A: It measures the volatility of negative returns, typically derived from historical data where returns fall below a target (e.g., risk-free rate).