Sharpe Ratio vs Sortino Ratio
What is it?
Both the Sharpe ratio and the Sortino ratio measure risk-adjusted return — how much return a fund generates per unit of risk taken. The Sharpe ratio uses total volatility (standard deviation, counting both up and down swings) in its calculation, while the Sortino ratio uses only downside volatility (just the bad swings), not penalizing a fund for upside surprises.
Why should you care?
A fund with a lot of upside volatility (big positive surprises) looks riskier under the Sharpe ratio than under the Sortino ratio, even though most investors don't actually mind large gains — only large losses. The Sortino ratio can give a fairer picture of risk-adjusted return for funds with a lot of positive skew.
Real-life example
Two funds have the same average return and the same Sharpe ratio. A closer look shows Fund A's volatility comes mostly from occasional big positive months, while Fund B's volatility comes mostly from occasional big negative months. Fund A's Sortino ratio comes out noticeably higher than Fund B's, because the Sortino ratio doesn't penalize Fund A for its upside swings the way the Sharpe ratio does.
Common mistakes
- Using only the Sharpe ratio to compare funds without checking whether their volatility is mostly upside or downside.
- Assuming a lower Sharpe ratio always means a worse fund, without checking the Sortino ratio for context.
- Comparing Sharpe or Sortino ratios across funds using different risk-free rate assumptions without checking they're consistent.
Sharpe ratio vs Sortino ratio
| Ratio | Volatility measure used | Penalizes upside swings? |
|---|---|---|
| Sharpe ratio | Total standard deviation (up + down) | Yes |
| Sortino ratio | Downside deviation only | No |
FAQ
Which ratio should I rely on more?
Neither replaces the other — Sharpe gives a total-volatility view, Sortino gives a downside-focused view. Checking both, especially for funds with asymmetric return patterns, gives a fuller picture.
Is a higher Sharpe or Sortino ratio always better?
Generally yes when comparing similar funds over the same period, but both ratios are historical measures and don't guarantee future risk-adjusted performance.
What's the risk-free rate used in these calculations?
Typically a government security or treasury bill yield is used as the risk-free rate benchmark — the exact rate used should be consistent when comparing ratios across funds.
Where can I find a fund's Sharpe and Sortino ratios?
Fund research platforms and analytics tools typically calculate and display both ratios using the fund's historical return data.
See this concept applied to your own portfolio
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