Risk Ratios
Risk ratios measure returns relative to the risk taken. A strategy earning 20% with 10% drawdowns is better than one earning 30% with 40% drawdowns. These ratios capture that distinction.
Quick Reference
| Metric | Formula | Tier Thresholds |
|---|---|---|
| Sharpe Ratio | (Expectancy / StdDev) × √(Trades/Year) | 2.0+ / 1.0+ / 0.5+ / <0.5 |
| Sortino Ratio | (Expectancy / Downside Dev) × √(Trades/Year) | 3.0+ / 2.0+ / 1.0+ / <1.0 |
| Calmar Ratio | Annualized Return / Max DD % | 1.5+ / 1.0+ / 0.5+ / <0.5 |
| Omega Ratio | Gross Profit / Gross Loss | 3.0+ / 2.0+ / 1.0+ / <1.0 |
| Return/DD Ratio | Net Profit / Max DD | 3.0+ / 1.5+ / 0.5+ / <0.5 |
| K-Ratio | Slope of log equity / StdErr of slope | 50+ / 40+ / 30+ / <30 |
| Recovery Factor | Net Profit / Max DD | 6.0+ / 4.0+ / 2.0+ / <2.0 |
| MAR Ratio | CAGR / Max DD % (same as CAR/MaxDD — alternate naming convention) | — |
| Ulcer Index | √(Mean of DD²) | — |
| UPI | CAGR / Ulcer Index | — |
| Efficiency Ratio | CAGR / Exposure % | — |
| CAR/MaxDD | CAGR / Max DD % | — |
| Avg Recovery Days | Mean time to recover from drawdowns | — |
| CVaR 5% | Mean loss in the worst 5% of trades | — |
| Gain/Pain Ratio | Net Profit / Abs(Sum of Losing Trades) | — |
| Burke Ratio | (CAGR - Rf) / √(Sum of DD²/N) | — |
Key Ratios Explained
Sharpe Ratio
The most widely used risk-adjusted return metric. Measures return per unit of volatility.
Sharpe = (Avg Trade P&L / StdDev of Trade P&L) × √(Trades Per Year)
Higher is better. A Sharpe of 1.0 means you're earning 1 unit of return per unit of risk. Above 2.0 is excellent.
Sortino Ratio
Like Sharpe, but only penalizes downside volatility. Upside volatility (big wins) is not penalized. This makes it a better measure for strategies with positive skew (occasional large wins).
Calmar Ratio
Annual return divided by worst drawdown. Directly answers "how much return do I get per unit of my worst loss?"
K-Ratio
Measures equity curve smoothness. It fits a straight line to the log of your equity curve and measures how tightly the equity follows that line. A high K-Ratio means consistent, steady growth.
| K-Ratio | Interpretation |
|---|---|
| ≥ 50 | Excellent — Very smooth equity curve |
| ≥ 40 | Good — Consistent growth |
| ≥ 30 | Caution — Some irregularity |
| < 30 | Failed — Erratic equity curve |
Ulcer Index
Measures the depth and duration of drawdowns. Unlike Max DD which only captures the worst, the Ulcer Index penalizes all drawdowns proportionally to their severity. Lower is better.
Recovery Factor
Net profit divided by maximum drawdown. A Recovery Factor of 5.0 means you earned $5 for every $1 of your worst drawdown. It answers "was the pain worth the gain?"
CVaR 5% (Conditional Value at Risk)
Also called Expected Shortfall. While Max Drawdown captures the single worst event, CVaR 5% answers "on average, how bad are my worst trades?" It calculates the mean loss across the worst 5% of all trades, giving a more stable picture of tail risk than any single extreme.
Gain/Pain Ratio
Net profit divided by the absolute sum of all losing trades. Similar to Profit Factor but expressed differently. A Gain/Pain of 0.5 means you kept $0.50 of profit for every $1 you lost along the way.
Burke Ratio
A drawdown-adjusted return metric. Unlike Calmar (which only uses max drawdown), Burke penalizes all drawdowns proportionally to their squared severity. This makes it sensitive to strategies with many moderate drawdowns, not just one large one.
Tip
Not sure which ratio matters most for your strategy? Check the Scoring System — AlgoChef weights these automatically in the Risk Score.
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