Calculate Your Portfolio’s Sortino Ratio for Downside Risk Analysis

The Sortino Ratio measures the performance of a portfolio relative to downside risk by focusing only on negative returns (as opposed to overall volatility). With the MarketXLS SortinoRatio() function, you can quickly evaluate how well your portfolio is compensated for the risks of negative returns over a specified period. This helps investors distinguish between volatility caused by market dips versus normal up-and-down fluctuations.

Why Use This Function?

• Measures risk-adjusted returns by considering only negative variability.
• Helpful in determining whether a portfolio’s returns justify the downside exposure.
• Allows you to incorporate a specified risk-free rate (e.g., 2%, 3%, or another benchmark rate).
• Offers a more targeted measure of “bad” volatility compared to traditional ratios that account for all overall volatility.
• Useful when comparing portfolios or funds that exhibit skewed risk profiles, such as strategies with fewer but significant drawdowns.

How to Use in Excel

Simply type the function into a cell in Excel, referencing your portfolio and optional parameters:

=SortinoRatio(portfolio, [period], [riskFreeRate])

• portfolio: The range or named range representing your portfolio composition (tickers and weights).
• [period] (optional): Number of months over which to calculate the ratio. Defaults to 12 if omitted.
• [riskFreeRate] (optional): Risk-free rate used as a benchmark return; defaults to 0 if omitted.

When invoked, the function gathers the specified portfolio data, calculates monthly returns, filters out positive returns (since Sortino excludes them from its risk measure), and computes the ratio adjusted by the square root of 12. This annualization step provides an annual risk-adjusted performance figure.

Parameters Explained

Example Usage

Below are some ways to use the SortinoRatio() function in Excel:

Basic Examples

1. Using only a portfolio reference (defaults to 12 months and 0% risk-free): =SortinoRatio(A1:B10)

   • A1:B10 might contain tickers in column A and their weights in column B.
   • Automatically calculates the Sortino ratio over a 12-month window with 0% risk-free rate.

2. Specifying a custom period (e.g., 6 months, 0% risk-free): =SortinoRatio(MyPortfolio, 6)

   • MyPortfolio is a named range with tickers and weights.
   • Evaluates the portfolio’s Sortino ratio over the last 6 months.

3. Specifying both period and risk-free rate (e.g., 12 months, 2% risk-free): =SortinoRatio(A1:B10, 12, 0.02)

   • A1:B10 references the portfolio composition.
   • Evaluates over the last 12 months, assuming a 2% annual risk-free rate.

Advanced Scenarios

• Evaluating multiple portfolios: Pull in weights and tickers for multiple strategies, put them in separate ranges (e.g., A1:B10, E1:F10), and calculate separate Sortino Ratios to compare.
• Testing sensitivity to higher or lower risk-free rates: Use what-if analysis on the riskFreeRate parameter to see how it affects your risk-adjusted returns.
• Integrating with data from other Excel functions: Combine SortinoRatio() with data from MarketXLS’s fundamental metrics, like SharpeRatio() or volatility measures, for a comprehensive performance dashboard.

Common Questions and Troubleshooting

• “Why am I getting 'NA'?”

• The function returns "NA" if an unexpected error occurs internally (e.g., invalid values in portfolio weights or no data for certain tickers). Check the portfolio references and ensure valid ticker data.

• “My portfolio weights don’t sum to 1—will SortinoRatio() still work?”

• The function automatically scales the portfolio composition so that total weight is 1 (unless the portfolio is entirely zeros). Verify the final ratio in conjunction with your actual weighting.

• “How does risk-free rate affect the result?”

• The function subtracts the monthly equivalent of the risk-free rate from total returns. A higher risk-free rate lowers the portfolio’s excess return, potentially lowering the ratio.

• “What if there are no negative returns for the selected period?”

• That situation can drive the downside deviation toward zero, resulting in a very large or undefined ratio.

By isolating downside risk, the SortinoRatio() function gives you a laser-focused view on how well your portfolio navigates drawdowns. Combine it with other MarketXLS analytics to keep your investments aligned with your risk tolerance and goals.