What is the difference between Sortino Ratio and Sharpe Ratio?
An example of an AI chatbot conversation about comparing Sortino and Sharpe ratios in finance.
What is the difference between Sortino Ratio and Sharpe Ratio?
The Sortino Ratio and Sharpe Ratio are both measures of risk-adjusted return, but they differ in how they assess risk. The Sharpe Ratio considers total volatility, while the Sortino Ratio focuses only on downside volatility.
Why is the Sortino Ratio considered better for some investors?
The Sortino Ratio is often preferred because it provides a clearer picture of downside risk, which is more relevant for investors concerned about losses rather than overall volatility.
Can you give me an example of how to calculate both ratios?
Sure! To calculate the Sharpe Ratio, you subtract the risk-free rate from the portfolio return and divide by the standard deviation of the portfolio's returns. For the Sortino Ratio, you do the same but divide by the downside deviation instead.
Which ratio should I use for my investment strategy?
It depends on your risk tolerance. If you're more concerned about downside risk, the Sortino Ratio might be more suitable. If you want a broader view of risk, consider the Sharpe Ratio.
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