# Sharpe, Sortino, and Information Ratio Intuition

`D00-F11-A08` · Financial Mathematics, Statistics, and Data Foundations → Financial Risk and Performance Statistics · archetype `record-transform` · difficulty 1/5 · verification **verified**

Full page: https://docs.thefintechbuilder.com/foundations/financial-risk-and-performance-statistics/sharpe-sortino-and-information-ratio-intuition/
Agent skill: `npx skills add IslamBaraka90/Fintech-Algorithms-Library` — https://docs.thefintechbuilder.com/guides/agent-skill/

## Install and import

```bash
npm install fintech-algorithms
```

```ts
import { sharpeSortinoAndInformationRatioIntuition } from "fintech-algorithms/foundations/financial-risk-and-performance-statistics/sharpe-sortino-and-information-ratio-intuition";
```

## Signature

```ts
sharpeSortinoAndInformationRatioIntuition(input)
```

Computes three reward-per-unit-of-risk ratios from the same series, each dividing an average by a different notion of risk.

## Parameters

| Name | Type | Required | Notes |
| --- | --- | --- | --- |
| `input` | `D00Input` | yes | Reads `returns` and `benchmark`, two aligned non-empty lists of finite periodic returns, `frequency`, the number of periods per year, `riskFree`, the per-period risk-free rate, `target`, the level below which downside is measured, and `confidence`, used when the loss series is prepared. |

## Returns

`D00Output`

`sharpe` is the mean excess return over its own sample standard deviation, `sortino` swaps that denominator for the downside deviation around `target`, and `informationRatio` divides the mean active return against the benchmark by the sample standard deviation of that active series.

## Errors

- When `returns` or `benchmark` is absent, empty, or holds a non-finite number — throws RangeError
- When `returns` and `benchmark` differ in length, or hold fewer than two observations — throws RangeError
- When `frequency` is zero or negative — throws RangeError
- When the excess-return volatility, the downside deviation, or the active volatility is zero — throws RangeError
- When `confidence` is absent, or outside the range zero to one — the engine reads it for every topic from A04 onward, including those that never use it — throws RangeError

## Complexity

Time `O(n log n)`, space `O(n)`.

## Worked example

This is the worked example published in the article, replayed by the test suite on every run. The output cannot drift.

### Input

`input`:

```json
{
  "returns": [0.01, -0.02, 0.015, -0.01, 0.03],
  "benchmark": [0.008, -0.01, 0.012, -0.006, 0.02],
  "frequency": 252,
  "target": 0,
  "confidence": 0.8,
  "riskFree": 0.0001,
  "weights": [0.6, 0.4],
  "covarianceMatrix": [
    [0.04, 0.01],
    [0.01, 0.09]
  ]
}
```

### Call

```ts
sharpeSortinoAndInformationRatioIntuition(input)
```

### Returns

object with 2 fields: sharpe, sortino

```json
{
  "sharpe": 0.245,
  "sortino": 0.49
}
```

## Verification and provenance

Tier: **verified** (via input-expected).

The worked example below is the figure published in this algorithm's article, replayed and asserted by the test suite on every build. The arithmetic cannot drift without the build failing.

Both tiers guarantee the signature. Full explanation: https://docs.thefintechbuilder.com/guides/verification/

Generated from the docs.json payload shipped inside fintech-algorithms@0.13.0.
The signature and parameter list are checked against the compiled implementation at build time,
so a description that contradicts the code fails the build rather than reaching this file.

## Links

- Article (how it works, step by step): https://thefintechbuilder.com/foundations/financial-risk-and-performance-statistics/sharpe-sortino-and-information-ratio-intuition/
- Implementation source: https://github.com/IslamBaraka90/Fintech-Algorithms-Library/blob/main/src/foundations/financial-risk-and-performance-statistics/sharpe-sortino-and-information-ratio-intuition/impl.ts
- Package on npm: https://www.npmjs.com/package/fintech-algorithms
- Domain index for agents: https://docs.thefintechbuilder.com/foundations/llms.txt