Sage-Tips

Is Sortino ratio better than Sharpe ratio?

As you can see, these are both meant to help gain a better understanding of a given investment’s risk-adjusted returns. However, because Sharpe ratio does not distinguish between upside – or good volatility – and downside – or bad volatility – Sortino is often a preferred measure of risk-adjusted performance.

Why is Sharpe ratio not good?

The problem with the Sharpe ratio is that it is accentuated by investments that don’t have a normal distribution of returns. The best example of this is hedge funds. Many of them use dynamic trading strategies and options that give way to skewness and kurtosis in their distribution of returns.

Is Sharpe ratio the best metric?

Sharpe Ratios above 1.00 are generally considered “good”, as this would suggest that the portfolio is offering excess returns relative to its volatility. Having said that, investors will often compare the Sharpe Ratio of a portfolio relative to its peers.

What Sortino ratio is best?

2 and above
As a rule of thumb, a Sortino ratio of 2 and above is considered ideal. Thus, this investment’s 0.392 rate is unacceptable.

What Sortino ratio tells us?

The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally.

Is a higher Sharpe ratio always better?

Usually, any Sharpe ratio greater than 1.0 is considered acceptable to good by investors. A ratio higher than 2.0 is rated as very good. A ratio of 3.0 or higher is considered excellent. A ratio under 1.0 is considered sub-optimal.

How do you evaluate a Sortino ratio?

The Sortino ratio is calculated by taking the difference between portfolio return and the risk-free rate and dividing this by the standard deviation of the negative returns.

What is the difference between Sharpe ratio and Information ratio?

The information ratio is similar to the Sharpe ratio, the main difference being that the Sharpe ratio uses a risk-free return as benchmark (such as a U.S. Treasury security) whereas the information ratio uses a risky index as benchmark (such as the S&P500).

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

The Sharpe ratio and the Sortino ratio are both risk-adjusted evaluations of return on investment. The Sortino ratio is a variation of the Sharpe ratio that only factors in downside risk.

What is a good Sharpe ratio for returns?

A Sharpe ratio of 1 or higher is commonly considered to be a good risk-adjusted return rate. The Sortino ratio variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio.

Which has a better Sortino ratio Scheme B or a?

The Sortino ratio of scheme A will be ( 15\%-7\%)/13\% is equal to 0.61\% and the Sortino ratio of scheme B will be ( 10\%-7\%)/13\% is equal to 0.75\%. Despite the fact the A has better returns, but Scheme B has a better Sortino ratio. Hence B will be a better investment option than A.

What is Sortino ratio in mutual funds?

The Sortino ratio is a tool that measures performance of mutual fund relative to the downward deviation. Here the focus is only on downside deviation. If you bought a stock at Rs.550, then the price going to Rs.600 is not a risk but the price going to Rs.510 is a risk.