Comparison
Sharpe Ratio vs Sortino Ratio
Understanding the key differences between these two popular risk-adjusted return metrics.
Both the Sharpe ratio and Sortino ratio measure risk-adjusted returns, but they differ in how they define “risk.” This distinction has important implications for portfolio analysis.
Side-by-Side Comparison
| Aspect | Sharpe Ratio | Sortino Ratio |
|---|---|---|
| Risk Measure | Total volatility (standard deviation) | Downside volatility only |
| Formula Denominator | σ (all returns) | σd (negative returns only) |
| Treats Upside Volatility | As risk (penalized) | Neutral (not penalized) |
| Best For | Symmetric return distributions | Asymmetric returns, downside focus |
| Industry Usage | More common, widely accepted | Growing popularity |
The Formulas
Sharpe Ratio
Uses total standard deviation
Sortino Ratio
Uses downside deviation only
The key difference is in the denominator: the Sharpe ratio uses total standard deviation (σp), while the Sortino ratio uses downside deviation (σd) - the standard deviation of only negative returns.
When to Use Each
Use Sharpe Ratio When:
- • Returns are roughly symmetric
- • Comparing to industry benchmarks
- • Working with traditional asset classes
- • Communicating with others (more widely known)
Use Sortino Ratio When:
- • You only care about downside risk
- • Returns are asymmetric (options, alternatives)
- • Comparing strategies with different volatility profiles
- • Evaluating tail risk protection
Practical Example
Consider two portfolios, both with 10% annual return above the risk-free rate:
Sortino = 10% / 8% = 1.25
Sortino = 10% / 10% = 1.0
Both portfolios have identical Sharpe ratios, but Portfolio A has a higher Sortino ratio because more of its volatility comes from upside moves. The Sortino ratio reveals that Portfolio A has better downside risk characteristics.
Our Recommendation
Use both metrics together. The Sharpe ratio provides a standardized view that's easy to compare across different investments and is widely understood. The Sortino ratio gives additional insight into whether volatility is “good” (upside) or “bad” (downside).
A portfolio with a high Sharpe ratio but low Sortino ratio might have significant downside risk. Conversely, a portfolio where Sortino is much higher than Sharpe indicates favorable asymmetry in returns.