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Sharpe Ratio vs Sortino Ratio

Sharpe measures excess return per unit of total volatility; Sortino measures return above a chosen target per unit of downside deviation, so gains above the target add nothing to its risk. A Sortino far above the Sharpe means the volatility sits mostly on the upside, as in the eight-quarter example’s 1.08 against 0.47, and ratios close together mean the losses are as wide as the whole series.
By InsiderFinance TeamUpdated Sources & Methodology
Sharpe Ratio

Use the Sharpe ratio when returns are roughly symmetric, when you need the most widely reported and comparable figure across funds and fact sheets, or when you are sizing leverage, since leverage scales excess return and volatility together and leaves the ratio unchanged in theory.

Sortino Ratio

Use the Sortino ratio when the payoff is deliberately asymmetric and penalizing upside would misstate the experience, and when you can state a meaningful target, such as a required return or benchmark, that the strategy must clear.

Sharpe Ratio vs Sortino Ratio

Sharpe Ratio vs Sortino Ratio
Sharpe RatioSharpe RatioSortino RatioSortino Ratio
Formula(Rp − Rf) / standard deviation of excess return(R − MAR) / downside deviation
Risk Measure in the DenominatorStandard deviation of all returns, upside and downsideDownside deviation, built only from returns below the target
Benchmark in the NumeratorRisk-free rate, commonly a short-term Treasury bill yieldMinimum acceptable return (MAR), set to zero, the risk-free rate, an index, or a goal
Treatment of a Large GainChanges both mean return and standard deviation; the ratio follows both changesRaises mean return without adding downside deviation when the gain exceeds the target
Best FitSymmetric, near-normal return streamsSkewed or asymmetric payoffs such as trend systems and option-selling programs
Comparability RequirementSame period, frequency, and risk-free rate across candidatesSame MAR, frequency, and downside deviation convention across candidates
How the Two CompareBelow the Sortino when gains supply most of the volatilityClose to the Sharpe when losses are as wide as the whole series
Main WeaknessUnderstates risk when returns have fat tails or skewSimple historical calculation understates downside risk when the sample holds few losses
On This Page

What is the difference between the Sharpe ratio and the Sortino ratio?

The Sharpe ratio divides average excess return by the standard deviation of excess returns, so every swing counts as risk, up or down. The Sortino ratio divides average return above a minimum acceptable return by downside deviation, so only shortfalls below that target count. Sharpe measures total variability; Sortino measures shortfalls below a target.

The target is part of the Sortino calculation. A zero target measures shortfalls below zero. A risk-free-rate target measures shortfalls below that rate. Changing the target changes both the numerator and the downside observations.

Sharpe vs Sortino ratio example

Take eight quarterly returns of 6%, 4%, −3%, 8%, −5%, 2%, 7%, and −1%. Their mean is 2.25%. With a zero risk-free rate, sample standard deviation is 4.83%, producing a Sharpe ratio of 0.47.

For a zero minimum acceptable return, square the three negative observations, sum them, divide by all eight periods, and take the square root. Downside deviation is sqrt((9 + 25 + 1) / 8) = 2.09 percentage points. The Sortino ratio is 2.25 / 2.09 = 1.08.

These are quarterly ratios calculated from quarterly returns. Keep the return frequency, sample window, benchmark, and denominator convention consistent when comparing strategies.

What the gap between Sharpe and Sortino ratios means

The gap between Sharpe and Sortino reflects the target and denominator as well as the shape of returns. A symmetric series of −1%, 1%, 3%, and 5% has a mean of 2%, sample standard deviation of 2.58%, and zero-target downside deviation of 0.5%. Sharpe is 0.775 and Sortino is 4.0 despite the symmetry.

Read the gap as the first look at asymmetry, then confirm it: a return histogram and a skew calculation show the shape directly, and maximum drawdown shows the deepest decline from a prior peak, which neither ratio reports.

How to use Sharpe and Sortino ratios in a trading review

Compare strategies over the same dates and include transaction costs. For options strategies, inspect the individual losses and gains alongside the ratios so the effect of the payoff structure is visible. Then connect the results to position size, holding period, and the market conditions in which the strategy operates.

Bottom line

Sharpe gives the total-volatility view, and Sortino gives the view of shortfalls below a chosen target. Calculate both on the same return series, frequency, and benchmark, then read them together with drawdown and confirm what their gap says about asymmetry with the return histogram.

Common questions

Sharpe Ratio vs Sortino Ratio: FAQ

Is the Sortino ratio better than the Sharpe ratio?
Each fits a different payoff. Sharpe compares excess return with total volatility, and Sortino compares return above a target with downside deviation. Use Sharpe for the full variability of the record and Sortino for shortfalls below the chosen target. Read drawdown and the return distribution alongside both.
Why is the Sortino ratio usually higher than the Sharpe ratio?
A smaller downside-deviation denominator produces a larger positive ratio when both numerators match. The relationship depends on the target and the returns. In the eight-quarter example on this page, with a zero target and zero risk-free rate, mean return is 2.25%, sample standard deviation is 4.83%, and downside deviation is 2.09%. The resulting ratios are 0.47 and 1.08.
What does it mean when the Sharpe and Sortino ratios are close together?
It means the downside is as wide as the whole distribution. With matching numerators, the ratios converge only when downside deviation nearly equals total standard deviation, which takes shortfalls below the target as large as the full spread of the series: the shape of returns whose losses run larger than their gains, such as the many small gains and occasional large losses of a premium-selling program. A symmetric series pulls the ratios apart instead: −1%, 1%, 3%, and 5% with a zero benchmark gives a Sharpe ratio of 0.775 and a Sortino ratio of 4.0. When the two converge, check the worst losses and the drawdown before sizing.
Does the Sortino ratio use the risk-free rate?
Only if the investor chooses it as the target. The Sortino ratio uses a minimum acceptable return, which can be zero for an investor with no tolerance for loss, the risk-free rate, a benchmark index return, or an absolute goal. Setting the MAR to the risk-free rate makes the Sortino ratio a close cousin of the Sharpe ratio, differing only in the denominator. Because the MAR appears in both the numerator and the denominator, changing it changes the ratio.
Can both ratios be negative?
Yes. The Sharpe ratio turns negative when average return falls below the risk-free rate, and the Sortino ratio turns negative when average return falls below the MAR. Both become hard to interpret in that range, because dividing a loss by a larger volatility gives a less negative number, so a more volatile losing strategy ranks above a stable one. Treat a negative reading as a prompt to inspect the return series and drawdown directly rather than as a ranking.
Which ratio should an options trader use?
Options strategies are asymmetric, so the Sortino ratio describes them more accurately. A premium-selling program produces many small gains and occasional large losses, and a long-premium program does the reverse. In both cases the Sharpe ratio charges for the shape of the payoff rather than the harm. Read the Sortino ratio next to maximum drawdown, since neither deviation statistic shows the worst peak-to-trough loss.

Sources and Further Reading

  1. CFA Institute: The Sortino Ratio
  2. CFA Institute: Risk-Adjusted Performance Measures
  3. Fidelity: Help Me Read This Table (Sharpe Ratio and Standard Deviation)

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