Sharpe & Sortino Ratio
Both measure risk-adjusted return — how much return a portfolio earned for the risk it took. Higher is better. The difference is how each one defines “risk.”
Sharpe ratio
The Sharpe ratio divides a portfolio’s excess return — its return above the risk-free rate (short-term Treasuries) — by its total volatility, the standard deviation of its returns:
Sharpe = (Rp − Rf) / σtotal
It answers: for each unit of volatility, how much extra return did I get? As a rough guide, a Sharpe near 1.0 is good, 2.0 very good, and above 3.0 excellent — though the “good” threshold depends on the period and asset class. Because it uses total volatility, the Sharpe ratio penalizes big upside swings exactly as much as downside ones, which many investors feel is too harsh — a large gain isn’t really “risk.”
Sortino ratio
The Sortino ratio is a refinement of Sharpe. It uses the same excess return but divides by the downside deviation — the volatility of only the negative returns:
Sortino = (Rp − Rf) / σdownside
By ignoring upside volatility, it measures return per unit of harmful risk (losses only). A portfolio with large positive swings but shallow losses will score higher on Sortino than on Sharpe. Sortino is usually the better lens when your real concern is avoiding drawdowns rather than smoothing every wobble.
Which should you use?
Use Sharpe as the standard, widely-comparable measure of risk-adjusted return. Reach for Sortino when you specifically care about downside risk — most people do, since a 5% loss stings more than a 5% gain delights. In practice, read both together: a Sortino much higher than the Sharpe tells you the portfolio’s volatility is mostly to the upside.
On this site both ratios are computed from monthly total returns, with the risk-free rate taken from a short-term Treasury series. Past performance is not a guarantee of future results — see the disclosures in the footer.