Given the limits of the Sharpe Ratio in assessing volatility, often the performance of an asset is measured using the Sortino Ratio (link to Sortino page).
The Sortino Ratio in fact measures the risk in a different way than the Sharpe Ratio. As we have seen, the Sharpe Ratio uses the standard deviation of returns as a measure of risk. This means that upward fluctuations are somehow qualified as "risk".
The Sortino Ratio, on the other hand, has been created specifically to take into account only negative fluctuations. In practical terms, the Sortino Ratio measures risk by evaluating the distribution of returns that are below a target or required return.
Hence the
Sortino Ratio is more effective as a tool for measuring the risk / return ratio.
Another variation of the Sharpe Ratio is the Treynor Ratio. This indicator uses the Beta (a measure of the volatility and risk of an investment relative to the general market) of a portfolio as a benchmark for risk.
The Treynor Ratio is particularly useful in determining whether an investor is compensated for taking a higher risk than "market risk".