Back to path GUIDEBOOKRisk-adjusted Return
UNIT 3

Sharpe / Sortino

Sharpe scales excess return by total volatility; Sortino penalizes downside variation.

Return qualitySharpe 1.3Check tails
What it tells you

How efficiently a return stream used measured risk.

When it is useful
  • Comparing similar strategies
  • Screening portfolios
When it fails
  • Assumes the sample is representative
  • Can hide skew and stale pricing
COMMON MISTAKE

Treating a single ratio as a complete verdict.

Evidence note

Risk-adjusted ratios are useful summaries but are sensitive to frequency, window, and return distribution.

60-SECOND CHEAT SHEET

Remember this.

  1. 1Sharpe = excess return ÷ volatility
  2. 2Sortino focuses downside
  3. 3Inspect the distribution
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