The Sortino Ratio Calculator is a vital financial tool that helps investors analyze the risk-adjusted return of an investment portfolio. Unlike other risk measures, the Sortino Ratio focuses on the downside risk, offering a more nuanced insight into the investment’s performance relative to its risk. By emphasizing negative volatility, the calculator aids investors in making informed decisions, ensuring they are compensated for the risks they take, especially when it comes to investments with asymmetric risk profiles.
Formula of Sortino Ratio Calculator
The Sortino Ratio is calculated using the formula:
Sortino ratio = (Ra−Rf) / STD
Where:
Ra— Average return on the asset;Rf— Risk-free rate;STD— Standard deviation of the downside or any negative return the company experienced.
This formula helps investors understand how much excess return they are receiving for the extra volatility endured on the negative side of the return distribution.
General Terms Table
To aid understanding and application, here’s a table of general terms frequently searched or used in conjunction with the Sortino Ratio:
| Term | Definition |
|---|---|
| Risk-Adjusted Return | The return of an investment adjusted for the risk taken to achieve it. |
| Downside Risk | The financial risk associated with negative returns on an investment. |
| Volatility | The degree of variation of trading prices over time, a measure of risk. |
| Risk-Free Rate | The theoretical rate of return of an investment with zero risk. |
This table provides a quick reference to understand the key components and terms related to the Sortino Ratio, making it easier for individuals to utilize the calculator effectively without extensive financial knowledge.
Example of Sortino Ratio Calculator
Consider an investment with an average return (Ra) of 12%, a risk-free rate (Rf) of 2%, and a standard deviation of negative returns (STD) of 5%. Using the Sortino Ratio formula, we calculate the ratio as follows:
Sortino ratio = (12% - 2%) / 5% = 2
A Sortino Ratio of 2 indicates that the investment returns two units of reward per unit of bad risk taken, highlighting an attractive risk-adjusted performance compared to an asset with a lower ratio.
Most Common FAQs
The primary difference lies in their risk measurements: the Sharpe Ratio considers both upside and downside volatility as risk, while the Sortino Ratio focuses only on downside risk or negative returns. This makes the Sortino Ratio potentially more useful for investors concerned specifically with downside risk.
The Sortino Ratio assists investors in identifying investments that deliver high returns for the downside risk undertaken. It is particularly valuable for comparing portfolios or investments with similar returns but differing risk profiles, making it easier to choose the investment that aligns with one’s risk tolerance.
Yes, a higher Sortino Ratio indicates that an investment is earning more excess return per unit of bad risk taken. It suggests better performance on a risk-adjusted basis, making it a desirable metric for investors seeking to maximize returns while minimizing negative volatility.