Calmar Ratio is a metric that measures the risk-adjusted performance of a portfolio. It is similar to the Sharpe ratio but uses the maximum drawdown as a measure of risk.
The Calmar ratio is a measure of risk-adjusted returns. Together with Sharpe and Sortino ratios, it is one of the most popular indicators for evaluating the performance of investment funds and portfolios. The principal difference between the Calmar ratio and other Sharpe-like ratios is that it is calculated using the maximum drawdown as a risk measure.
The maximum drawdown for many investors is a more understandable measure of risk than the volatility (standard deviation) used to calculate the Sharpe ratio. It represents the largest drop in the price of an asset from its peak value over a certain period.
When comparing investment funds or portfolios with each other, investors should consider both the profitability of the investment and the risks associated with it. And funds that show higher returns without taking on greater risks are considered to be better investments. The Calmar ratio is designed to help understand whether a higher return is associated with a higher risk or not.
For example, suppose the value of the Calmar ratio for a portfolio or fund is 2. In that case, this means that for the selected period, the annualized return exceeds two times the maximum drawdown.
All things being equal, a fund or portfolio with a higher Calmar ratio is the preferred investment.
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