Sharpe ratio

This ratio was developed by William Forsyth Sharpe in 1966. Sharpe originally called it the "reward-to-variability" ratio in before it began being called the Sharpe Ratio by later academics and financial professionals. Recently, the (original) Sharpe ratio has often been challenged with regard to its appropriateness as a fund performance measure during evaluation periods of declining markets (Scholz 2007).
The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the mean return per unit of risk in an investment asset or a trading strategy.
The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken. When comparing two assets each with the expected return E[R] against the same benchmark with return Rf, the asset with the higher Sharpe ratio gives more return for the same risk. Investors are often advised to pick investments with high Sharpe ratios.
Sharpe ratios, along with Treynor ratios and Jensen’s alphas are often used to rank the performance of portfolio managers.

 

Sortino Ratio

A ratio developed by Frank A. Sortino to differentiate between good and bad volatility in the Sharpe ratio. This differentiation of upwards and downwards volatility allows the calculation to provide a risk-adjusted measure of a security or fund's performance without penalizing it for upward price changes. It it is calculated as follows:

The Sortino ratio is similar to the Sharpe ratio, except it uses downside deviation for the denominator instead of standard deviation, the use of which doesn't discriminate between up and down volatility.