## What Is the Sortino Ratio?

The **Sortino ratio** is a risk-adjustment statistics metric used to calculate the return from a certain investment for a given level of negative risk. It is a refined version of the more widely known **Sharpe ratio**. The **Sharpe ratio** considers total price deviation in the calculation, while the Sortino ratio considers a downside deviation while calculating.

The basic formula to calculate the Sortino ratio is:

`=(Rp–Rf)/σd`

**R**is the portfolio’s_{p}**Expected Return**or**Actual Return**.**R**is the portfolio’s_{f }**Minimum Acceptable Return**(**MAR**)/**Risk-free rate of return**.**σd**is the**Downside Deviation**or**Standard Deviation of negative asset return**.

## How to Calculate the Sortino Ratio in Excel: 2 Methods

### Method 1 – Calculate the Sortino Ratio Using Excel Formulas

We have the average return percentage of a certain company for **6** months. The risk-free return of the portfolio is **7**%.

**Steps:**

- Calculate the
**Excess Return**with the following formula in**Cell D5**.

`=C5-$C$13`

- Press
**Enter**.

- Use the
**Fill Handle**(**+**) tool to get the return for the rest of the values.

- Here’s the result.

- We will separate only
**Negative Excess Returns**with the following formula in E5, then using AutoFill through the column.

`=IF(D5<0,D5,0)`

- Use the following formula to calculate the square of
**Negative Excess Returns**.

**=E5^2**

- Use
**the SUM function**for the total of**Excess Returns**. - We also calculated the total of the square of
**Negative Excess Return**values using the**SUM**formula.

- Calculate the average of the
**Excess Return**using the following formula:

`=D11/6`

The formula to calculate the **Downside Risk** is:

` =√(∑(Square of Negative Excess Returns)/No. of months)`

- Use this formula to calculate
**Downward Risk:**

`=SQRT(F11/6)`

- To calculate the Sortino ratio, divide
**Average Excess Return**by**Downside Risk**.

`=C14/C15`

**Note:**

If you want to calculate the Sortino ratio against the **Actual Return** of a random month, follow these steps:

- After calculating the
**Downside Risk**following the steps above, subtract the**Risk-Free Return**from the specific**Actual Return**. - To calculate the Sortino ratio for the
**Average Return**of**Cell C7**, use the below formula:

`=(C7-C13)/C14`

- You can calculate the Sortino ratio for any other
**Actual Return**and thus compare which investment is safe.

**Read More: **How to Calculate Sharpe Ratio in Excel

### Method 2 – Excel VBA to Calculate the Sortino Ratio

We will use the same dataset that was used in **Method 1**.

**Steps:**

- From the
**Ribbon**, go to the**Developer**tab. - Select
**Visual Basic**.

- The
**VBA**window will appear. - Go to the
**Insert**option. - Select a new
**Module**.

- Use the following code in the newly inserted
**Module**.

```
Function Ratio_Sortino(returns As Range, MAR As Variant) As Variant
Dim x As Integer
Dim y As Integer
Dim RetAvg As Double
Dim m2 As Double
Dim dev As Double
x = returns.Rows.Count
RetAvg = WorksheetFunction.Average(returns)
moment2d = 0
For y = 1 To x
If returns(y) - MAR < 0 Then
m2 = m2 + ((returns(y) - MAR) ^ 2)
End If
Next
dev = Sqr(m2 / x)
If dev > 0 Then
Ratio_Sortino = (RetAvg - MAR) / dev
Else
Ratio_Sortino = "undefined"
End If
End Function
```

- Use this formula in Cell
**C13**and hit**Enter**.

- We will get the Sortino ratio for the above data.

**Read More: **How to Calculate Ratio of 3 Numbers in Excel

## Observations from Calculating the Sortino Ratio

- By calculating the Sortino ratio for a specific portfolio’s
**Actual Return**, you can check the return on investment. - By comparing the Sortino ratio of certain actual returns, you can check which investment is safer to pursue.
- The
**Sortino ratio**is really helpful to retail investors as it helps them to make the right decision about any investment.

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