Risk-adjusted return — the only return number you should quote.
Raw return tells you the headline. Sharpe and Sortino tell you whether you were paid for the risk you took. Move the inputs, see the change.
Built and reviewed by Stephen Omukoko Okoth
Mathematical Economist · ex-Morgan Stanley FI · Equilar
Inputs
Strategy returns
Verdict
0.37 Sharpe • 0.50 Sortino
Sharpe says weak; Sortino says acceptable.
If Sortino is much higher than Sharpe, the strategy has lots of upside volatility — that's good, and Sharpe is unfairly punishing it. If they're similar, the return distribution is roughly symmetric.
Result
Both metrics
Sharpe ratio
0.37
Excess return / total vol
Sortino ratio
0.50
Excess return / downside vol
Excess return
5.50%
Above risk-free
Sortino vs Sharpe gap
0.13
Larger = more positive skew
Reference
Roughly what's normal
- S&P 500 long-run: ~0.4 Sharpe
- 60/40 portfolio: ~0.5
- Sharpe > 1.0 sustained: very strong
- Sharpe > 2.0 sustained: usually too good to be true — check fees, leverage, and survivorship bias
Common questions
What is the Sharpe ratio?
(Annual return − risk-free rate) ÷ annual volatility. It measures excess return per unit of total risk. Above 1.0 is solid, above 2.0 is exceptional, below 0.5 is mediocre.
Why use Sortino instead?
Sharpe penalizes upside volatility the same as downside. But upside isn't risk — it's what you wanted. Sortino divides only by downside deviation, so a strategy with rare big up days isn't punished. It's a cleaner risk-adjusted metric for skewed return distributions.
What's a 'good' Sharpe ratio?
S&P 500 long-run: ~0.4. A diversified 60/40 portfolio: ~0.5. Top hedge funds claim 1.0+, often time-period dependent. Anything above 2.0 sustained over 10 years is rare and worth questioning.
Can Sharpe be misleading?
Yes. It assumes returns are roughly normal — but real markets have fat tails (more extreme outcomes than normal predicts). Strategies that sell tail risk (option writing, leveraged carry) often look fantastic by Sharpe until they blow up. Look at Sortino, max drawdown, and Calmar alongside.