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What it calculates: Sortino Ratio, Excess Return, Band (0 below 0 / 1 under 1 / 2 at or above 1).
Updated 5 June 2026 · Transparent assumptions
Same 10 points of excess, a smaller denominator because only losses count
The numerator is identical to the Sharpe ratio: 12% return less a 2% risk-free rate is 10 points of excess. The difference is entirely in the denominator. Sharpe divides by total volatility of 15%; Sortino divides by downside deviation of 10%, which counts only the returns that fell below the threshold.
The gap between the two ratios is a measurement in itself. A Sortino well above the Sharpe says most of the volatility was upside — the strategy moved a lot, but mostly in the direction you wanted. The two converging says the movement was symmetric, and the distinction stops mattering.
Returns above the threshold are set to zero, not excluded
The standard calculation takes every period return, replaces anything above the target with zero, squares the shortfalls, averages across ALL periods, and takes the square root. Averaging across all periods rather than only the bad ones is the part most often got wrong, and it matters: dividing by the count of losing periods instead inflates the deviation and understates the ratio.
The target itself is a choice. Using zero measures deviation below break-even; using the risk-free rate measures it below the safe alternative; using a required return measures it below what you actually need. Each produces a different ratio, so a Sortino figure without its target stated is not comparable to another.
Asymmetric strategies need it; symmetric ones do not
Sortino earns its keep on strategies with genuinely asymmetric return distributions — trend following, long-volatility positions, anything with occasional large gains. On those, Sharpe systematically understates quality by treating the good tail as risk.
For a broadly diversified equity portfolio whose returns are roughly symmetric, the two ratios rank funds almost identically and Sharpe is simpler and more widely reported. Sortino also has a practical weakness: because it uses only the downside observations, it is estimated from fewer data points and is noisier on short histories.
Depth and duration of loss, which drawdown measures instead
Downside deviation summarises how far returns fell below a threshold on average. It says nothing about whether those falls were consecutive. A strategy losing 2% a month for a year and one losing 24% in a single month can produce similar downside deviation and completely different experiences.
Maximum drawdown answers that question directly — the largest peak-to-trough decline, and how long recovery took. Read a Sortino ratio alongside a drawdown figure, because the ratio describes the distribution while the drawdown describes the worst path actually travelled.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.
Returns are assumptions, not guarantees. Actual results may vary because of market performance, taxes, fees, inflation, and timing. This is an educational projection, not investment advice.
Published the calculator with its formula, worked example, assumptions, limitations and a bespoke guide, and added an automated formula test suite covering it.
Tested that the Sortino ratio exceeds the Sharpe ratio whenever downside deviation is below total volatility, which is the entire reason the measure exists.
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