Calmar Ratio

Learn more about Calmar Ratio

The Calmar ratio is a measure of the performance of a trading/investment strategy that takes into account the risk of loss. It is calculated by taking the ratio between the average annual return of the strategy over a given period and the maximum drawdown over the same period. Drawdown refers to the maximum decline of the strategy relative to its historical peak. The Calmar ratio is therefore a measure of the relationship between potential return and risk of loss.

The Calmar ratio is considered an indicator of a trading/investment strategy's ability to generate high returns while minimizing losses. A Calmar ratio greater than 1 is considered good, indicating that the strategy generated returns greater than its maximum drawdown. A Calmar ratio less than 1 indicates that the strategy suffered significant losses relative to its returns.

$$\text{Calmar Ratio} = \frac{r_p - r_{rf}}{\text{max. drawdown}}$$

rp = return on assets/strategy

rrf = risk-free rate return

More info: Investopedia

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