Sortino vs Sharpe

What this risk-adjusted returns interview question tests

This is an easy finance question that probes whether you understand the practical difference between two standard performance metrics: the Sharpe ratio and the Sortino ratio. Both measure risk-adjusted returns, but they penalize risk in fundamentally different ways, and the gap between them tells a specific story about a strategy's return distribution.

To answer questions like this, you need to know what each ratio captures: how they differ in their treatment of volatility, which types of volatility matter to each, and what a large divergence between the two implies about where a strategy's losses are concentrated. The question rewards candidates who can interpret financial metrics beyond memorized definitions—connecting the numbers to the actual behaviour of the strategy.

• Volatility vs. downside deviation
• Symmetry assumptions in performance measurement
• What skewness and tail behaviour reveal about strategy risk