Under what circumstances is a sortino ratio lower than a sharpe ratio? What does it mean about the distribution?
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$\begingroup$ distribution of the portfolio returns? $\endgroup$– develaristSep 14, 2020 at 20:34
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$\begingroup$ Yes. And how can it be understood intuitively? $\endgroup$– NickpickSep 14, 2020 at 20:37
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1 Answer
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Whereas the Sharpe ratio divides the risk premium (mean excess return) by the volatility, the Sortino ratio instead divides by semideviation: the standard deviation computed using only negative returns.
For perfectly symmetric return distributions, these should not differ much. However, if a return distribution has skewness, then the Sortino ratio may be very different. In this case, a smaller Sortino ratio means a larger semideviation -- so a negatively-skewed return distribution. When we look at log-returns for individual stocks, such negative skewness is not unusual for a number of economic reasons.
