What is Calmar ratio?

The Calmar ratio compares the reward an investment delivered with the worst pain it caused along the way. The reward is the compound annual growth rate, or CAGR, which is the steady yearly rate that would turn the starting amount into the ending amount. The pain is the maximum drawdown, the largest fall from a previous high to a later low before the value recovered. Dividing the first by the second gives one number. A higher ratio means more return was earned for each unit of worst-case loss.

Say you invest $10,000 in portfolio A and ten years later it is worth about $19,670. That works out to roughly 7% a year, because 1.07 multiplied by itself ten times is about 1.967. Along the way the portfolio rose to $14,000, then fell to $9,800. The drop is $4,200, and $4,200 divided by $14,000 is 30%. The Calmar ratio is 7 divided by 30, or about 0.23. Now take portfolio B, which grows at 5% a year to about $16,290 but whose worst fall was 10%. Its ratio is 5 divided by 10, or 0.5. Portfolio B earned less in total, yet it delivered more than twice as much return per unit of its deepest decline.

The ratio has clear limits. It rests on a single worst episode, so two portfolios with the same deepest fall score alike even if one suffered many painful declines and the other only one. It says nothing about how long the portfolio stayed below its old high. The result also depends heavily on the period measured: a window that happens to miss a severe crash can make almost anything look attractive. For that reason, ratios are only comparable when calculated over the same dates, and figures from a backtest, a test of rules on past data, are hypothetical and can be flattered by overfitting.

For a private investor building a long-term portfolio, the Calmar ratio puts the focus on the number that most often tests behaviour: the size of the worst fall. The S&P 500, dividends included, fell 54.6% from peak to low in 2007–2009, and loss arithmetic means a 50% loss needs a 100% gain just to get back to the start. Investors often read the Calmar ratio alongside the Sharpe and Sortino ratios to judge whether a return came with a level of loss they could realistically sit through.

By Dr. Harry Hamann

How do you calculate the Calmar ratio?
Divide the compound annual growth rate by the maximum drawdown, ignoring the minus sign. A portfolio growing 8% a year with a worst fall of 40% has a Calmar ratio of 8 divided by 40, which is 0.2.

What is a good Calmar ratio?
There is no universal threshold, as results depend on the period. As a reference point, the S&P 500's 10.7% a year since January 1993 against its −54.6% fall in 2007–2009 gives a ratio of roughly 0.2 over that period.

What is the difference between the Calmar ratio and the Sharpe ratio?
The Sharpe ratio measures return against volatility, meaning how much returns swing up and down overall. The Calmar ratio measures return against the single deepest peak-to-trough fall, so it focuses on worst-case loss rather than everyday fluctuation.