Which statement accurately describes the main difference between the Sharpe Ratio and the Sortino Ratio?

Question: Which statement accurately describes the main difference between the Sharpe Ratio and the Sortino Ratio?

Answer options:

• The Sharpe Ratio uses total risk (standard deviation), while the Sortino Ratio uses only downside deviation.
• The Sharpe Ratio uses a risk-free rate, while the Sortino Ratio uses the minimum acceptable return (MAR).
• The Sharpe Ratio measures overall volatility, while the Sortino Ratio measures only bear market volatility. ✅ Both A and B.

Correct answer: Both A and B.

Explanation: The Sharpe Ratio measures excess return over the risk-free rate per unit of total risk (standard deviation). The Sortino Ratio measures excess return over a minimum acceptable return (MAR) per unit of downside deviation, specifically focusing on returns below the MAR.