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The Basics of Sortino Ratio Calculation

Written by admin
Wed Jan 18 2023
The Basics of Sortino Ratio Calculation - MarketXLS
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The Basics of Sortino Ratio Calculation - MarketXLS

The Basics of Sortino Ratio Calculation

The Sortino Ratio is a risk efficiency measure that helps investors compare the return of a single investment to its corresponding downside risk. It is very similar to the Sharpe Ratio, except that it only incorporates downside risk rather than total volatility when measuring the risk-reward. The Sortino Ratio is an important tool for assessing how to optimize your investment portfolio for maximum return and least risk.

What Is a Sortino Ratio?

The Sortino Ratio is a measure of an investment’s risk-adjusted return. It is used to assess return on investment (ROI) against downside risk, as opposed to the traditional Sharpe Ratio, which measures ROI against total risk.

It was developed by Frank A. Sortino, a professor of finance at Santa Clara University, and replaces the total volatility of the traditional Sharpe ratio with just downside volatility.

The Sortino Ratio takes into account the volatility and potential risk — as well as the gain — associated with an investment. It focuses specifically on downside risk while also measuring the potential return of the investment. This allows investors to determine if the return of an investment compensate for the risk taken.

How to Calculate Sortino Ratio

The formula for Sortino Ratio calculation is as follows:

Sortino Ratio = Return – Target Return / Downside Deviation

The first step is to calculate the return on the investment, minus the target return. The target return is the desired return from the investment given the level of risk taken by the investor.

The second step is to subtract the target return from the investment return, then divide that number by the downside deviation. Downside deviation measures the volatility of the investment for negative returns below the target return.

Tools for Sortino Ratio Calculation

Once you have the formula for calculating the Sortino Ratio, you need a tool to see the results. Tools like MarketXLS’s Investment Sortino Ratio Calculator and Portfolio Sharpe Ratio can help you quickly and easily analyze and visualize your investments’ performance.

Asset Allocation Optimization and Sortino Ratio

The Sortino Ratio is an important tool for any investor, as it helps to measure the risk-reward of any particular investment. This allows investors to compare different investments and determine which ones offer the optimal rewards given their associated risk profiles.

Additionally, the Sortino Ratio is an important tool for investors looking to optimize the performance of their portfolio through asset allocation optimization. With the Sortino Ratio, investors can measure their portfolio’s risk-adjusted returns and adjust their holdings to maximize their reward while minimizing downside risk.

MarketXLS Helps Analyze your Portfolio Performance

MarketXLS is an online portfolio analysis tool that helps investors analyze their portfolio and determine the optimal risk-reward of their investments. It provides a number of customizable tools, including the Investment Sortino Ratio Calculator and Portfolio Sharpe Ratio tool, that allow investors to precisely analyze their portfolio performance.

MarketXLS helps investors determine the reward of their investments and improve their portfolio performance with an optimal asset allocation optimization. This allows investors to maximize their returns while minimizing the downside risk associated with their holdings.

Here are some templates that you can use to create your own models

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Sortino Ratio Of Portfolio (With Marketxls Formulas)
Crypto Portfolio Analytics
Portfolio Optimization
Sharpe Ratio Of Portfolio (With Marketxls)
Risk Parity Portfolio In Excel – Explanation & Construction

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