Sharpe penalizes a position or strategy for both upside and downside volatility whereas Sortino excludes negative volatility in its risk analysis assuming positive volatility manifests as potential appreciation. Thus, the Sortino ratio omits positive volatility entirely from its formula and uses only the negative standard deviation in its calculation rather than the total standard deviation used in the Sharpe ratio. The Sortino ratio is preferred by analysts when analyzing low-volatility position while the Sharpe ratio is found to be optimal for high-volatility portfolios.
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