# Sortino Ratio Calculator

## Answers the Question

How much are we earning relative to our risks?

## What Is the Sortino Ratio?

The Sortino ratio is used for comparing various investment possibilities in a risk-adjusted manner. In this way, investors can consider not only returns but the risks that they are required to accept in order to earn them.

The higher the value, the more attractive the investment.

## Why Is it Important?

• Without a firm understanding of risks involved, higher-earning (but risky) investments will always appear to be the superior choice. Unfortunately, as risks increase, the odds of a catastrophic loss of capital do too.

## Formula(s) to Calculate Sortino Ratio

• SORTINO RATIO = (EXPECTED RATE OF RETURN - RISK-FREE RATE OF RETURN) / (DOWNSIDE RISK)

## Common Mistakes

• Miscalculation of downside risk. If sufficient data is not available, the calculated values will be unreliable.
• Comparing values that calculated downside risk differently. There are two methods in popular use, one that is continuous and one that is discrete. Although the discrete method is simpler to calculate, it is less accurate.