Sortino ratio

Ever wondered how to compare investments fairly, considering their risks?

Imagine you're choosing between two savings accounts. One offers a higher interest rate but comes with more uncertainty, while the other offers a lower rate but is more predictable.

Think of it like choosing between two roller coasters. The first one has exciting ups and downs, while the second one is smoother but still thrilling. The Sharpe ratio helps you figure out which ride offers more excitement for the level of unpredictability, giving you a fair comparison.

Example

Account A offers 5% with a 2% chance of losing money, while Account B offers 3% with no chance of losing money. The Sharpe ratio helps you decide which is better considering both the potential gains and the risks.

Remember this

The Sharpe ratio tells you how much extra return you're getting for taking on extra risk.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

Related concepts

Sharpe ratio

Sharpe ratio measures excess return per unit of risk: (R - Rf) / σ

Bias ratio

Bias ratio detects valuation bias in asset pricing

Deflated Sharpe ratio

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Graham number

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Treynor ratio

Treynor ratio measures excess return per unit of systematic risk

Risk premium

Why do some investments pay more than others?

Educational content, not financial advice.

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