The Sharpe ratio and the Sortino ratio are both riskadjusted evaluations of return on investment. The Sortino ratio is a variation of the Sharpe ratio that only factors in downside risk.
A Sharpe ratio is calculated by subtracting the rate of return on an investment considered riskfree, such as a U.S. Treasury bill, from the expected or actual return on an equity investment portfolio or on an individual stock, then dividing that number by the standard deviation of the stock or portfolio. The Sharpe ratio indicates how well an equity investment is performing compared to a riskfree investment, taking into consideration the additional risk level involved with holding the equity investment. A negative Sharpe ratio indicates that the investor would have a better riskadjusted rate of return using a riskfree investment. A Sharpe ratio of 1 or higher is commonly considered to be a good riskadjusted return rate.
The Sortino ratio variation of the Sharpe ratio only factors in downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it therefore should not be included in the risk calculation. Therefore, the Sortino ratio takes upside volatility out of the equation and uses only the downside standard deviation in its calculation instead of the total standard deviation that is used in calculating the Sharpe ratio.
Analysts commonly prefer to use the Sharpe ratio to evaluate lowvolatility investment portfolios and the Sortino variation to evaluate highvolatility portfolios.

What is the difference between a sharpe ratio and an information ratio?
Understand the meaning of the Sharpe ratio and the information ratio, and understand how they differ as tools for evaluating ... Read Answer >> 
What is the difference between a Sharpe ratio and a Traynor ratio?
Understand the difference between two methods of evaluating portfolio returns on investment, the Sharpe ratio and the Treynor ... Read Answer >> 
What is the difference between the Sharpe ratio and alpha?
Use alpha and the Sharpe ratio to evaluate mutual funds by comparing their riskadjusted returns. Learn what modern portfolio ... Read Answer >> 
What are the advantages and disadvantages of zerobased budgeting in accounting?
Learn how the information ratio is calculated as a riskadjusted measure of performance, and understand how it seeks to differentiate ... Read Answer >> 
How do you the calculate Sharpe ratio in Excel?
Learn how to use Microsoft Excel to calculate the Sharpe ratio, an investing tool useful for assessing the relationship between ... Read Answer >> 
How can I use expected return with my risk profile to make an investment decision?
Understand the basic concepts of expected returns, risk tolerance and riskadjusted returns, and how investors use these ... Read Answer >>

Investing
Mitigating Downside With The Sortino Ratio
Differentiate between good and bad volatility with the Sortino Ratio. 
Investing
How The Sharpe Ratio Can Oversimplify Risk
When it comes to hedge funds, this measure is not reliable on its own. 
Investing
Understanding The Sharpe Ratio
This simple ratio will tell you how much that extra return is really worth. 
Investing
Find The Highest Returns With The Sharpe Ratio
Learn how to follow the efficient frontier to increase your chances of successful investing. 
Investing
Understanding Financial Models
A financial model is a representation of some aspects of a firm or given security. It uses historical numbers to create calculations that inform financial recommendations or predict future financial ... 
Financial Advisor
The Debt To Equity Ratio
The debt to equity ratio identifies companies that are highly leveraged and therefore a higher risk for investors. Find out how this ratio is calculated and how you can use it to evaluate a stock. 
Investing
Sharpe Ratio
Learn about this ratio developed by Nobel laureate William F. Sharpe to measure riskadjusted performance. 
Investing
Efficiency Ratio
There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ... 
Investing
Ratio Analysis
Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ... 
Investing
Sysco and Other Big Movers In Services
The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...

Sortino Ratio
A modification of the Sharpe ratio that differentiates harmful ... 
Sterling Ratio
A ratio used mainly in the context of hedge funds. This riskreward ... 
Modified Sharpe Ratio
A ratio used to calculate the riskadjusted performance of an ... 
RiskAdjusted Return
A concept that refines an investment's return by measuring how ... 
Downside Deviation
A measure of downside risk that focuses on returns that fall ... 
Ratio Analysis
A ratio analysis is a quantitative analysis of information contained ...