Sharpe & Sortino Ratio Calculator
Risk-adjusted return, measured two ways.
How Sharpe and Sortino ratios are calculated
Raw returns alone don't tell you whether a portfolio's performance is genuinely skillful or just the result of taking on more risk. The Sharpe and Sortino ratios both answer that by expressing return per unit of risk, so you can compare two portfolios with different volatility profiles on a like-for-like basis. The two metrics differ only in how they define "risk": Sharpe uses total volatility, while Sortino counts only the downside — the volatility investors actually experience as loss.
Sharpe ratio = (Portfolio Return − Risk-Free Rate) / Standard Deviation. Sortino ratio = (Portfolio Return − Risk-Free Rate) / Downside Deviation. Using this calculator's defaults — a 12% portfolio return, a 4.5% risk-free rate, 18% standard deviation, and 12% downside deviation — the Sharpe ratio is (12% − 4.5%) / 18% ≈ 0.42, and the Sortino ratio is (12% − 4.5%) / 12% = 0.625. The Sortino figure is higher here because the portfolio's downside deviation is lower than its total standard deviation, meaning some of its volatility came from upside surprises rather than losses. For a related risk-adjusted return concept, see the CAPM calculator, and to express returns net of inflation, see the Inflation Adjusted Return calculator.
Frequently asked questions
- Sharpe vs Sortino — which should I use?
- Sharpe penalizes all volatility, including upside surprises. Sortino only penalizes downside volatility, which better matches how most investors actually think about risk — a fund with big upside swings and few downside ones will score better on Sortino than Sharpe.
- How do I calculate downside deviation?
- Take the standard deviation of only the returns that fell below your target (often the risk-free rate or zero) — this tool expects that figure as an input rather than computing it from raw return data.
- What is the Sharpe ratio?
- The Sharpe ratio, developed by Nobel laureate William Sharpe, measures how much excess return a portfolio generates per unit of total risk (volatility). It is calculated as (portfolio return − risk-free rate) divided by the portfolio's standard deviation.
- What is a good Sharpe ratio?
- As a rough guide: below 1 is considered subpar, 1–2 is good, 2–3 is very good, and above 3 is excellent. In practice, most diversified long-term portfolios sit somewhere around 0.5–1.5, so ratios much higher than that over a full market cycle are unusual.
- What is the difference between the Sharpe and Sortino ratio?
- Both measure risk-adjusted return, but Sharpe uses total standard deviation (all volatility, up and down) as its risk measure, while Sortino uses only downside deviation. Two portfolios with identical Sharpe ratios can have very different Sortino ratios if one has more upside volatility than the other.
- Why does the Sortino ratio only penalise downside volatility?
- Because most investors don't actually mind volatility that comes from unexpectedly good returns — the risk they care about is losing money. Sortino reflects that by excluding upside swings entirely from the risk calculation, only counting deviations below the target return.
- What are the limitations of the Sharpe ratio?
- The Sharpe ratio assumes returns are normally distributed, which understates risk for strategies with fat tails or skewed return distributions (e.g. option-selling strategies). It also treats upside and downside volatility identically, which can penalise a fund purely for having big winning periods.
- How do I choose a risk-free rate for the Sharpe calculation?
- Use a rate that matches your portfolio's currency and time horizon — typically a short-term government bill yield (e.g. 3-month US Treasury) for a standard annual Sharpe calculation. See the Risk-Free Rate tool for a current reference figure.