What Is the Sortino Ratio? Definition and Example
The Sortino ratio is the Sharpe ratio with one fix: it only counts downside swings as risk. Here is the formula, what a good number looks like, and when it beats Sharpe.
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What Is the Sharpe Ratio? Definition and Example
The Sharpe ratio tells you how much return you earned for each unit of volatility. Here is the formula, what counts as a good number, and what the S&P 500’s has been.
Key takeaways
- The Sharpe ratio is return above the risk‑free rate divided by volatility. Common rule of thumb: below 1 is ordinary, 1–2 is good, above 2 is rare. The S&P 500’s was 0.86 over the 10 years to Sep 30, 2026.
- Over 1928–2023, the S&P 500’s long‑run Sharpe ratio was about 0.4–0.5 on annual data, so a portfolio near 1 for a decade is unusually efficient.
- Only 74 of 470 large US stocks beat the S&P 500’s 5‑year Sharpe ratio in Exent’s data.
- Always compare Sharpe ratios over the same period. One great year can make any number look good.
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What is the Sharpe ratio?
The Sharpe ratio measures return per unit of risk. It takes what a portfolio earned above cash and divides it by how much the portfolio swung. A higher number means you were paid more for the ups and downs you lived through. It is one of the core ways to judge risk‑adjusted return.
Sharpe ratio = (portfolio return − risk‑free rate) ÷ standard deviation of returns
See how this applies to your own holdings with an Exent portfolio check.
What is a good Sharpe ratio for my portfolio?
A Sharpe ratio near or above the S&P 500 index’s over the same period is a sensible bar. The bands below are a common convention, not an official standard.
| Sharpe ratio | Common reading |
|---|---|
| Below 0 | Did worse than cash |
| 0 to 1 | Ordinary; most stocks and funds sit here over long periods |
| 1 to 2 | Good, especially if it lasts 5+ years |
| Above 2 | Rare outside short windows; check the period |
What has the S&P 500’s Sharpe ratio been historically?
It moves a lot with the window. In Exent’s data, as of Sep 30, 2026, SPY’s Sharpe ratio was:
| Window to Sep 30, 2026 | SPY Sharpe ratio | SPY volatility |
|---|---|---|
| 1 year | 0.97 | 13.3% |
| 3 years | 1.40 | 12.5% |
| 5 years (includes 2022) | 0.69 | 15.7% |
| 10 years | 0.86 | 15.3% |
Over a much longer span the number is lower. Using Aswath Damodaran’s NYU Stern data on annual S&P 500 total returns and T‑bill rates, the Sharpe ratio works out to about 0.42 for 1928–2023 and 0.49 for 1950–2023.
Why it matters for a self‑directed investor
Raw return hides how much risk you took. Two portfolios can both return 12% a year while one falls twice as far in a crash. The Sharpe ratio puts them on the same scale. Compare yours with a risk‑matched benchmark to see whether your picks earned their risk. For ways to lift it, see how to improve your Sharpe ratio.
Common mistakes
- Comparing a 1‑year Sharpe ratio with a 10‑year one.
- Ignoring that it punishes upside swings as much as losses. The Sortino ratio fixes that.
- Trusting it for assets with rare, large crashes, where a calm history overstates safety.
See your portfolio’s Sharpe ratio with Exent
- Upload a screenshot of your holdings, or a CSV, Excel, PDF or Google Sheet; no brokerage login.
- Portfolio Analysis reports your Sharpe, Sortino and Calmar ratios next to a risk‑matched benchmark.
Frequently asked questions
Yes, over several years it is good. The S&P 500’s 10-year Sharpe ratio to Sep 30, 2026 was 0.86, and its long-run figure since 1928 is closer to 0.4–0.5.
Use a short-term Treasury bill yield for the same period as your returns. Using the wrong period can move the ratio noticeably.
Yes. A negative Sharpe ratio means the portfolio returned less than cash over the period.
Usually, but not always. A very high figure over a short window often reflects luck or a calm market rather than skill.
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Educational content, not investment advice. Examples are illustrative; past performance does not guarantee future results.