@railpath/finance-toolkit/dist/risk/calculateSortinoRatio.js

Production-ready finance library for portfolio construction, risk analytics, quantitative metrics, and ML-based regime detection

"use strict";
Object.defineProperty(exports, "__esModule", { value: true });
exports.calculateSortinoRatio = calculateSortinoRatio;
const SortinoRatioOptionsSchema_1 = require("../schemas/SortinoRatioOptionsSchema");
const SortinoRatioResultSchema_1 = require("../schemas/SortinoRatioResultSchema");
/**
 * Calculate Sortino Ratio
 *
 * Sortino = (Mean Return - Target Return) / Downside Deviation
 *
 * Unlike Sharpe, only penalizes downside volatility (returns < target).
 *
 * @param options - Returns, target return, risk-free rate, annualization
 * @returns Sortino Ratio and downside deviation metrics
 */
function calculateSortinoRatio(options) {
    const { returns, riskFreeRate, targetReturn, annualizationFactor } = SortinoRatioOptionsSchema_1.SortinoRatioOptionsSchema.parse(options);
    // Mean return
    const meanReturn = returns.reduce((sum, r) => sum + r, 0) / returns.length;
    // Annualized return
    const annualizedReturn = meanReturn * annualizationFactor;
    // Downside deviation (only returns below target)
    const downsideReturns = returns.filter((r) => r < targetReturn);
    if (downsideReturns.length === 0) {
        // No downside → very high Sortino (cap at high value)
        return SortinoRatioResultSchema_1.SortinoRatioResultSchema.parse({
            sortinoRatio: 999999, // Use large number instead of Infinity
            annualizedReturn,
            downsideDeviation: 0,
            annualizedDownsideDeviation: 0,
            excessReturn: annualizedReturn - riskFreeRate,
        });
    }
    const downsideVariance = downsideReturns.reduce((sum, r) => sum + Math.pow(r - targetReturn, 2), 0) / returns.length; // Divide by total returns, not just downside
    const downsideDeviation = Math.sqrt(downsideVariance);
    // Annualized downside deviation
    const annualizedDownsideDeviation = downsideDeviation * Math.sqrt(annualizationFactor);
    // Excess return
    const excessReturn = annualizedReturn - riskFreeRate;
    // Sortino Ratio
    const sortinoRatio = annualizedDownsideDeviation !== 0
        ? excessReturn / annualizedDownsideDeviation
        : 0;
    return SortinoRatioResultSchema_1.SortinoRatioResultSchema.parse({
        sortinoRatio,
        annualizedReturn,
        downsideDeviation,
        annualizedDownsideDeviation,
        excessReturn,
    });
}