⚖️ Risk-Adjusted Performance
Sharpe and Sortino ratios from a return series.
This measures whether an investment's returns are actually worth the risk taken to earn them, using two industry-standard ratios: Sharpe (which penalizes all volatility) and Sortino (which penalizes only downside volatility).
Sharpe Ratio:
Sharpe = (Rp − Rf) / σp
where Rp is the portfolio return, Rf is the risk-free rate, and σp is the standard deviation of returns. Sortino Ratio uses the same numerator but divides by downside deviation only (volatility from returns below a minimum target), since Sortino's premise is that upside volatility isn't really 'risk' from an investor's perspective.
Two portfolios might both return 12% annually, but if Portfolio A has a standard deviation of 8% and Portfolio B has 15%, Portfolio A has a materially higher Sharpe ratio — meaning it delivered similar returns with much less bumpiness along the way.
A common error is comparing Sharpe ratios across different asset classes or time periods without matching the risk-free rate used; results aren't comparable unless the same benchmark and period are applied consistently.
What it does
Computes average return, volatility, and the Sharpe and Sortino ratios from a series of periodic returns, so you can judge risk-adjusted performance.
When to use it
Use it to compare two funds or strategies on an equal footing — higher return is only 'better' if it isn't bought with disproportionate risk.
Assumptions
- Returns are entered as percentages per period (monthly or annual).
- Sharpe uses total volatility; Sortino uses only downside volatility.
- More periods give a more reliable estimate.
Prefer the fund with the better Sharpe/Sortino over the one with the higher raw return when you will hold through volatility. A Sharpe above 1 is good and above 2 is strong. Sortino is the better gauge for strategies that aim to cut downside.