What Is the Difference Between the Sharpe Ratio and the Sortino Ratio?

General investors are becoming more aware of some of the ratios used to measure investment risk, return on an investment and its return adjusted for the risk undertaken.

Before selecting an investment asset, investors should seek the risk-adjusted return and not just the simple return. The Sharpe ratio and the Sortino ratio are both risk-adjusted evaluations of return on investment.

·??????The Sharpe ratio indicates how well an equity investment is performing compared to a risk-free investment, taking into consideration the additional risk level involved with holding the equity investment.

·??????The Sortino ratio is a variation of the Sharpe ratio that only factors in downside risk. i.e, it excludes “good” risk and measures only the ‘bad”.

Takaways:

·??????The Sharpe ratio and the Sortino ratio are risk-adjusted evaluations of return on investment.

?·??????The Sharpe ratio indicates how well an equity investment is performing compared to a risk-free investment, taking into consideration the additional risk level involved with holding the equity investment.

·??????The Sortino ratio is a variation of the Sharpe ratio that only factors in downside risk.

?·??????As with the Sharpe ratio, a higher Sortino is better.

?·??????Analysts commonly prefer to use the Sharpe ratio to evaluate low-volatility investment portfolios and the Sortino variation to evaluate high-volatility portfolios.