Sharpe, Sortino and Calmar side by side (advanced)
Three risk-adjusted ratios can rank the same two funds in three different orders — and the disagreement between them is more informative than any single one of the three numbers alone.
Why raw return alone isn't the ranking you want
Ranking funds by return alone answers "which grew more", not "which grew more for the bumpiness it put you through" — and for anyone actually holding a fund through its down months, the second question usually matters more. That’s what all three of these ratios are for: each divides a fund’s return by some measure of the pain involved in earning it. Where they differ is in exactly what counts as "pain".
Sharpe: reward per unit of total bumpiness
Reward earned per unit of bumpiness (the Sharpe ratio) — higher is better. More → divides the return by How much the price swings year to year — lower is calmer. More → — every swing, up or down, counts equally as "risk". That’s a deliberate simplification: a fund that swings up sharply gets penalised by Sharpe exactly as much as one that swings down sharply, even though most people would happily take more upside volatility. It’s the most widely used of the three precisely because it’s simple and well understood, not because it’s the most accurate model of what actually worries a holder.
Sortino: the same idea, minus the swings that don't hurt
Like the Sharpe ratio, but it only counts downward swings as risk. Higher is better. More → fixes Sharpe’s blind spot by only counting How much the fund swings, counting only the down moves — a measure of bad volatility. More → — downward swings — as risk, on the reasonable view that a sudden jump up never hurt anyone. Two consequences follow: a fund that’s choppy mainly on the way up (a strong bull-market performer with occasional sharp rallies) looks meaningfully better on Sortino than on Sharpe, and Sortino is the fairer of the two when you’re specifically worried about downside, not volatility in general.
Calmar: reward against the worst single gut-punch
Return compared with the worst drop over the period. Higher means better reward for the pain endured. More → takes a completely different shape: instead of an average of all the wobbles (up or down), it divides return by the single worst peak-to-trough The biggest fall from a peak over the period shown. More → over the period. That makes it the most "tail-risk" focused of the three — a fund that’s calm 95% of the time but had one brutal crash scores worse on Calmar than its average-volatility numbers would suggest, because Calmar cares specifically about the worst thing that happened, not the typical day.
When they actually disagree — and what that tells you
For a fund with fairly symmetric, evenly-spread returns, all three ratios tend to tell a similar story and the choice between them barely matters. They pull apart for a fund with a lopsided pattern: strong Sortino but weak Sharpe points to a fund that’s volatile mainly on the upside; strong Sharpe/Sortino but weak Calmar points to a fund that’s usually calm but has one nasty crash sitting in its history that the averages smooth over. Reading the three together, rather than picking a favourite and ignoring the rest, tells you not just how risk-adjusted a fund’s return is, but what kind of risk it actually carried.