Sharpe Ratio vs Sortino Ratio: Which Risk Metric Is Better?
Both the Sharpe and Sortino ratios measure risk-adjusted returns, but they define risk differently. This distinction matters more than most investors realize.
What Is Sharpe Ratio?
The Sharpe ratio divides excess return by total volatility (standard deviation). It penalizes both upside and downside volatility equally.
What Is Sortino Ratio?
The Sortino ratio divides excess return by downside deviation only. It only penalizes negative volatility, recognizing that upside volatility is actually desirable.
Key Differences
| Feature | Sharpe Ratio | Sortino Ratio |
|---|---|---|
| Risk measured | Total volatility | Downside volatility only |
| Penalizes upside? | Yes | No |
| More accurate for | Symmetric returns | Asymmetric returns |
| Higher is | Better | Better |
| Common threshold | > 1.0 is good | > 1.5 is good |
The Bottom Line
The Sortino ratio is theoretically more accurate because investors only care about downside risk. However, the Sharpe ratio is more widely used and recognized. Report both when evaluating strategies.
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