The Sharpe ratio and the Sortino ratio are both measures of risk-adjusted return, but they differ in how they measure risk.
The Sharpe ratio is calculated by subtracting the risk-free rate of return from the investment’s return, and then dividing that number by the investment’s standard deviation of returns. The result is a ratio that indicates how much excess return an investment generates for each unit of risk it takes on.
On the other hand, the Sortino ratio is also calculated by subtracting the risk-free rate of return from the investment’s return, but it uses the investment’s “downside” standard deviation as the measure of risk, instead of the overall standard deviation. The downside standard deviation is a measure of the volatility of the investment’s negative returns, which is considered to be the more relevant measure of risk for investors who are trying to avoid losses. The result is a ratio that indicates how much excess return an investment generates for each unit of downside risk it takes on.
Additionally, the Sharpe ratio is a widely used and well-known measure of risk-adjusted return, while the Sortino ratio is less well known and not as widely used. Both ratios can be useful tools for investors, but the Sharpe ratio is more commonly used and may be more familiar to many investors.
In summary, the Sharpe ratio and the Sortino ratio are both measures of risk-adjusted return, but the Sortino ratio focuses on downside risk and is therefore more relevant for investors who are trying to avoid losses.