Calmar Ratio

Calmar Ratio

The Calmar Ratio is a performance metric used to evaluate the return of an investment relative to its risk, specifically focusing on drawdown risk. It is calculated by dividing the annualized return of an investment by its maximum drawdown. A higher Calmar Ratio indicates a more favorable risk-return profile.

Formula

Calmar Ratio = Annualized Return / Maximum Drawdown

Example

Consider an investment that has an annualized return of 15% and a maximum drawdown of 10%. The Calmar Ratio would be:

Calmar Ratio = 15% / 10% = 1.5

Case Study

Investment A has an annualized return of 12% and a maximum drawdown of 8%, resulting in a Calmar Ratio of 1.5. Investment B, on the other hand, has an annualized return of 10% but a maximum drawdown of 5%, yielding a Calmar Ratio of 2.0. In this scenario, Investment B is considered to have a better risk-adjusted return despite its lower annualized return.