# Calmar Ratio

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The **Calmar ratio** is a juxtaposing of the average annual compounded rate of return and the maximum drawdown risk of commodity trading advisors and hedge funds. If the **Calmar ratio** is lower, the investment performed on a risk-adjusted basis over the specified period time is worse. On the other hand, the higher the **Calmar ratio**, the better it performed. Carlos Oliveira in his literary work entitled "Practical C++ Financial Programming" describing **Calmar ratio** as a "measure of investment returns as compared to possible annual losses. It is used to compare investments with different risk profiles. The **Calmar ratio** is defined as the average annual rate of return for a given period, divided by the maximum drawdown (i.e., the maximum loss) during the same period. If you consider the same rate of return, investment with higher **Calmar ratio** had lower risk during the considered period" (C. Oliveira 2015, s. 123).

\(Calmar Ratio=\frac{Annual Return}{Maximum Drawdown}\)

## Annual Return

The **annual return** is the return that an investment submits over some time a while. It is defined as a time-weighted annual percentage. Sources of returns may include dividends, capital appreciation and returns of capital. The rate of **annual return** is pointed against the initial amount of the investment and represents a geometric mean rather than a simple arithmetic mean (B. R Hopkins 2012, s. 110).

## Return Over Maximum Drawdown

The **Return over maximum drawdown**, in the field of hedge fund management, id described as the difference between a portfolio's maximum point of return, and any further low point of performance. The **Maximum drawdown** is the biggest difference between a high-water and a subsequent low. **Maximum drawdown** is the most popular way of expressing the risk of a given portfolio - particularly as associated track records become longer - for investors who believe that observed loss patterns over longer periods are the best available proxy for actual issuance. In general terms, **return over maximum drawdown** is simply the average return in a given year that a portfolio generates, expressed as a percentage of this drawdown figure (CFA Institute 2017, s. 190).

## Difference Between Calmar Ratio and other ratios

The **Calmar ratio** is very similar to the **Sharpe** and **Sterling** Ratios, however, the main difference among these performance criteria is the proxy used for risk. The **Calmar ratio** is not as popular as the other to but is being used more frequently because it is simpler and easier to calculate than the **Sterling** or **Sharpe** ratios. What is more, the **Calmar ratio** gives a more realistic view of performance results. Reversely, the **Sharpe** ratio has the shortcoming of not reflecting the performance rightly in case autocorrelation is present in the returns. Greg N. Gregoriou is writing: "The **Calmar ratio** has numerous pitfalls the most prominent of which is ignoring the second and third greatest drawdowns. The other shortcoming is that the maximum drawdown is larger as the period time becomes longer; this characteristic of the **Calmar ratio** causes a lack of time-invariance" (G. N. Gregoriou 2008, s. 61).

## References

- CFA Institute (2017),
*CFA Program Curriculum 2018 Level III*, John Wiley & Sons - Eling M. (2008),
*Does the Measure Matterin the Mutual Fund Industry?*, "Financial Analysts Journal", Vol. 64, No. 3 - Gregoriou G. N. (2008),
*Encyclopedia of Alternative Investments*, CRC Press - Hopkins B. R. (2012),
*Starting and Managing a Nonprofit Organization: A Legal Guide*, John Wiley & Sons - Johnsson R. (2010),
*A Simple Risk-Return-Ratio*, "Richard CB Johnsson, Ph.D. in Economics" - Magdon-Ismail M. (2004),
*An Analysis of the Maximum DrawdownRisk Measure* - Oliveira C. (2015),
*Practical C++ Financial Programming*, Apress - Steinki O., Mohammad Z. (2015),
*Common Metrics for PerformanceEvaluation: Overview of Popular Performance Measurement Ratios*, "Educational Series"

**Author:** Patryk Kozioł