The Calmar Ratio Explained

The Calmar Ratio Explained

The Calmar Ratio was created by Terry W. Young in 1991, it is short for California Managed Account Reports. The Calmar ratio is usually based on recent and short term data. The Calmar ratio gives investors insight into the risk parameters of different investments and money managers. 

The Calmar Ratio contrasts the risk of maximum drawdown and the annual  average compounded return rate of money managers, investment portfolios, or trading systems. A Calmar ratio that is lower shows an investment performed worse on a risk-adjusted basis in a specified time period than an investment with a Calmar ratio that is higher. The higher the Calmar ratio the better an investment or manager performed. The average time period used  in this ratio is usually three years, but the time period can vary depending on whether the investor wants to look at a longer or shorter time period. 

The Calmar Ratio is not as well known as other risk adjusted return metrics. However the risk-adjusted filter of the Calmar ratio makes it a valuable metric for investment performance as it specifically filters risk and return factors to show the true overall success of an investment. 

Here is the formula for calculating the Calmar Ratio: 

Calmar Ratio = Average Annual Rate of Return / Maximum Drawdown

To calculate the Calmar ratio for an investment or fund, you start with its average annual rate of return for the most recent past three years and then divide that by the investment’s maximum drawdown from equity peak over that period of time.  If an investment had an average annual rate of return is 20% and its maximum drawdown is 10%, its Calmar ratio is 2.

The Calmar Ratio Explained

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