Calmar Ratio: Definition, Formula and Calculator
There are many risk performance metrics, and the Calmar Ratio is one of the rather unknown, at least compared to the Sharpe Ratio. The Calmar Ratio is a bit different and assesses an investment’s performance against its most severe drawdown period. This article looks at the essence of the Calmar Ratio, including its calculation process, and how it serves investors looking to measure the risk-adjusted returns yielded from diverse investment strategies.
The Calmar Ratio is a performance measure that focuses on maximum drawdown and is used to judge the performance of funds and strategies. This ratio, which is obtained by dividing the annualized rate of return of a strategy by its maximum drawdown, provides a means for investors to compare the risk-adjusted performance of various investment strategies. Commonly used when measuring the performance of mutual funds or hedge funds, the ratio can equally well be used by independent traders to evaluate their trading strategies.
Its unique focus on maximum drawdown as the primary risk component sets the Calmar Ratio apart from many other performance measures. So, what exactly is this ratio, and how is it calculated? Let’s find out:
Key Takeaways
- The Calmar Ratio is a risk-adjusted performance metric that divides an investment strategy’s annualized rate of return by its maximum drawdown, focusing specifically on the strategy’s return per unit of downside risk.
- A higher Calmar Ratio indicates better risk-adjusted performance and is generally more favorable. It shows that the strategy has yielded higher returns for the amount of downside risk taken.
- While the Calmar Ratio is a useful tool for comparing the risk-adjusted performance of various investment strategies over a common 36-month timeframe, it has limitations due to its exclusive focus on maximum drawdown, excluding other risks such as volatility, leverage, liquidity, and market risks.
What is the Calmar Ratio?
The Calmar Ratio is a risk-adjusted metric that measures the performance of an investment fund, such as a hedge fund, by assessing its risk. This ratio scrutinizes the relationship between the risk and return of an investment over a specific set period.

A higher Calmar Ratio is generally more favorable as it suggests that the fund has higher returns on a risk-adjusted basis.
Furthermore, the ratio is also useful for backtesting trading strategies or models using historical data, just like we do on this website, offering a balanced view of a fund’s portfolio performance over time. A significant change in the Calmar Ratio, or the MAR ratio, can indicate the effect of actions on an investment fund’s performance, making it a somewhat reliable indicator of performance trends.
Calmar Ratio Calculator
Let’s show you how you can use the Calmar Ratio calculator:
- Enter the annual return (%) of your investment.
- Input the maximum drawdown (%) experienced by your investment.
- Click on the “Calculate Calmar Ratio” button to see the result.
The Calmar Ratio is calculated as the annual return ratio to the maximum drawdown’s absolute value. A higher Calmar Ratio indicates better risk-adjusted returns.
Yuo can use this calculator to assess the performance of your investments, funds, or strategies.
How is the Calmar Ratio calculated?
The Calmar Ratio is calculated by looking at two components: the annual rate of return and the maximum drawdown of the investment strategy over a set period.
The maximum drawdown is measured from the fund’s peak to trough over the same period, representing the largest decline in the fund’s or strategy’s value from its peak.
In this context, the drawdown ratio, also known as the Calmar Ratio, is calculated by dividing the average return by the maximum drawdown over the set period.
Let’s make an example:
If a fund gains 25% in the first year, 45% in the second year, but loses 33% in the third year, the average return over three years is 12.3%, and the maximum drawdown is 33%. In this case, many investors would calculate the Camar Ratio as 12.3 divided by 33, but we’re afraid that’s incorrect. We want the CAGR or geometric return, not the average return. In this case, the annual return (CAGR) is only 6.7%. Thus, the Calmar Ratio is calculated as 6.7 divided by 33, which is 0.2. We have covered the geometric vs. arithmetic return in a separate article.
Here are the steps to calculate the Calmar Ratio:
- Determine the cumulative return by dividing the investment’s final value by its initial value.
- Calculate the annualized rate of return using the cumulative return. Raise this to the power of 1/n, where n is the number of years. Then subtract 1 from the result.
- Find the maximum drawdown by identifying an equity peak and the following lowest point until the next equity peak over a specified timeframe. Calculate the percentage decline from the highest to the lowest point. There might be many such peaks and throughs, but the max drawdown is the biggest one.
- Divide the annualized rate of return by the maximum drawdown, with both expressed as percentages.
That’s it! It’s not complicated and pretty straightforward.
By following these steps, you can accurately perform the Calmar Ratio calculation for your investment or trading strategy.

What is the Calmar Ratio formula?
The Calmar Ratio’s formula is quite simple, and is derived by dividing the investment fund’s estimated annual rate of return by its maximum drawdown. The formula for the Calmar ratio is expressed as:
Calmar Ratio = (Rp – Rf) / Maximum drawdown, where Rp is the portfolio return and Rf is the risk-free rate.
The annual rate of return (Rp – Rf) refers to how the fund has performed over a year or a set period, measured as a percentage increase or decrease in the fund’s portfolio value. The maximum drawdown quantifies the fund’s largest percentage loss from peak to trough during a specific investment period. This measurement helps investors evaluate the risk associated with the fund’s performance.
The maximum drawdown component represents the largest percentage decline from an investment strategy’s peak value to its subsequent low point within a specified time frame.

What does the Calmar Ratio measure?
The Calmar Ratio measures risk-adjusted performance for investment funds such as hedge funds, commodity trading advisors (CTAs), and trading strategies. The ratio provides a perspective on performance over a typical time frame, most commonly set at 36 months, but it can be any period you like. It helps investors understand how much return an investment strategy has generated per unit of downside risk taken, allowing for more comparisons between different investment strategies.
However, it’s important to note that the Calmar Ratio’s focus on maximum drawdown as the only risk measure means it has a limited view of risk and does not consider general volatility (as the Sharpe Ratio does), reducing its statistical significance compared to other measures.
Regardless of this limitation, the Calmar Ratio remains a valuable tool for investors, assisting in balancing their risk appetite with their investment decisions.
How do you calculate Calmar Ratio in Excel?
To calculate the Calmar Ratio in Excel, you start by determining the investment’s annual rate of return for the previous three years (or any period you want to measure).
Next, you calculate the maximum drawdown by subtracting the investment’s lowest value from its highest value during the same period and then dividing the difference by the highest value. Once the annual rate of return and maximum drawdown are calculated, these figures are input into separate cells in Excel.
The Calmar Ratio is then obtained by dividing the annual rate of return by the maximum drawdown using Excel’s division function. The result of the division is the Calmar Ratio for the investment, which can be interpreted as the average annual return per unit of risk measured by the maximum drawdown.
Should the Calmar Ratio be high or low?
The Calmar ratio should be high. A higher Calmar ratio is generally viewed as more favorable as it indicates better performance on a risk-adjusted basis over a given time frame, typically 36 months (or whatever period you decide to measure).
The Calmar Ratio’s unique use of maximum drawdown as its sole measure of risk makes it more understandable for some investors than other more abstract risk measures. It’s a very simple ratio to calculate and is easier to understand than volatility, for example. Furthermore, volatility might be a misleading measure.
However, the Calmar Ratio’s focus on maximum drawdown as the only risk measure means it offers a limited view of risk and does not account for general volatility, perhaps making it less statistically significant compared to other measures, at least in theory.
What is the difference between Calmar Ratio and Sharpe Ratio?
The Calmar and Sharpe ratios are risk-adjusted performance measures, but they differ in their calculation methodologies and what risks they focus on. While the Sharpe Ratio and the Calmar Ratio both gauge an investment’s performance after adjusting for risk, they apply different risk metrics.
The Sharpe Ratio calculates this adjusted performance by comparing it to a portfolio’s overall volatility—the standard deviation encompassing all fluctuations in value. On the other hand, with a focus squarely on the maximum drawdown experienced, the Calmar Ratio measures how well an investment performs over time relative to its most significant period of decline.
These ratios illuminate distinct aspects of how investments fare when considering risk-adjusted returns. Their combined use might enable a more holistic view for evaluating portfolio performances based on varying dimensions of risk exposure.
Is a higher Calmar Ratio better?
Yes, a higher Calmar ratio is better because it indicates a better risk-adjusted return, reflecting stronger performance relative to the investment’s drawdown.
Typically, a trading strategy boasting a higher Calmar Ratio indicates superior management of downside risk in proportion to its annualized return, highlighting good performance when adjusted for risk.
Why is the Calmar Ratio useful for investors?
The Calmar Ratio is useful for investors because it measures risk-adjusted return, helping them assess investment performance relative to downside risk, which is important for managing portfolio risk effectively.
Beyond numbers and statistics, the Calmar Ratio offers tangible insights for investors. By measuring an investment’s efficiency on a risk-adjusted basis, it helps indicate how much risk was involved in achieving a return. This ratio is particularly useful for comparing the performance of different investment funds, considering their risk of significant drawdowns.
How does the Calmar Ratio differ from other risk-adjusted performance measures?
The Calmar Ratio differs from other risk-adjusted performance measures in that it specifically focuses on downside risk by comparing an investment’s annualized return to its maximum drawdown. This ratio is particularly useful for evaluating investment performance over time, especially in volatile markets.
The Calmar Ratio stands out among the myriad of measures for risk-adjusted performance available to investors due to its exclusive focus on maximum drawdown as an indicator of risk. This method sets it apart from alternative metrics that may rely on less concrete risk assessments. Its typical evaluation over three years provides additional credibility by mitigating the influence of short-term market fluctuations.
A limitation accompanies this strength. Because the Calmar Ratio concentrates exclusively on drawdown when measuring risk, it disregards overall volatility. This oversight can restrict its statistical relevance and practicality in various situations.
What is the concept of downside risk in relation to the Calmar Ratio?
The concept of downside risk in relation to the Calmar Ratio refers to measuring the potential losses or negative returns an investment may experience, particularly during market downturns or adverse conditions. The Calmar Ratio, which compares the average annual rate of return to the maximum drawdown, helps investors assess risk-adjusted returns with a focus on downside protection.
The concept of downside risk, which refers to potential losses in an investment, is the essence of computing the Calmar Ratio. The ratio incorporates maximum drawdown as a measure of downside risk, using it to adjust the annualized return of an investment strategy and create a risk-adjusted performance metric. A lower maximum drawdown indicates that an investment strategy has better managed downside risk, which can result in a higher Calmar Ratio, signaling superior risk-adjusted performance.
The Calmar Ratio helps investors understand how much return an investment strategy has generated per unit of downside risk taken.
What is a good Calmar Ratio?
A good Calmar Ratio is typically above 1, indicating that an investment’s annualized return outweighs its maximum drawdown.
A higher Calmar Ratio is usually deemed outstanding as it indicates superior risk-adjusted performance. A Calmar Ratio of 1 is generally considered outstanding, indicating that the investment’s annual return roughly equals the maximum drawdown. A Calmar Ratio between 2 and 3 is normally an accomplishment almost out of this world, especially over many years.
We argue that a Calmar Ration above 0.5 is good if you’re examining periods over more than 3 years.
How does the Calmar Ratio help investors evaluate the risk-return tradeoff?
The Calmar Ratio helps investors assess the risk-return tradeoff by comparing an investment’s annualized return to its maximum drawdown. This provides a clearer picture of risk-adjusted returns over time.
It measures risk-adjusted performance, allowing investors to compare the efficiency of different investment strategies and the tradeoff between risk and reward. This ratio helps investors understand how much return an investment strategy has generated per unit of downside risk taken, thus allowing for more informed comparisons between different investment strategies.
A higher Calmar Ratio suggests that a trading strategy has historically managed downside risk better relative to its annualized return, indicating good risk-adjusted performance. However, it’s important to remember that the Calmar Ratio does not capture all types of risk, and other factors should be considered when evaluating the risk-return tradeoff.
What are some limitations of the Calmar Ratio?
Some limitations of the Calmar Ratio include its reliance on past performance, susceptibility to outliers, and potential for misleading results during periods of market volatility.
Despite providing insights into an investment’s risk-return profile, the Calmar Ratio does have some limitations. Its sole focus on maximum drawdown as a measure of risk provides a limited view compared to other gauges considering general volatility. This focus means the Calmar Ratio might not be as statistically significant or useful for some investors.
While reducing sensitivity to market volatility, the ratio’s standard three-year time frame may not capture the full extent of an investment’s risk profile over different market cycles. We recommend using a lookback period of much more than 3 years.
Furthermore, the Calmar Ratio may not be suitable for comparing different asset classes due to the varying degrees of risk, liquidity, and market dynamics inherent to each asset class, which are not fully accounted for in the ratio.
Furthermore, the Calmar Ratio may not be suitable for comparing different asset classes due to the varying degrees of risk, liquidity, and market dynamics inherent to each asset class, which are not fully accounted for in the ratio.
How frequently should the Calmar Ratio be calculated and monitored?
The Calmar Ratio should be calculated and monitored regularly. However, there’s no definition of how often. If done annually, that should be more than enough.
The frequency with which the Calmar Ratio is calculated and monitored can vary based on the investor’s requirements and the characteristics of the investments.
Originally, the Calmar Ratio was calculated every month to provide a more up-to-date reading of a fund’s performance compared to other gauges. Its creator, Terry W. Young, argued that the monthly calculation made the Calmar Ratio smoother and less sensitive than the Sterling Ratio.
However, considering the Calmar Ratio over extended periods can gauge an investment’s sustainability for long-term investment strategies, suggesting that less frequent monitoring may be appropriate for long-horizon investors.
How does the Calmar Ratio measure risk-adjusted returns in trading strategies?
The Calmar Ratio measures risk-adjusted returns in trading strategies by comparing the annualized rate of return to the maximum drawdown, calculating how much return is generated per unit of risk taken.
The Calmar Ratio is an effective instrument for evaluating risk-adjusted returns across various trading strategies. It measures the efficiency of a trading strategy by comparing its annualized return to its maximum drawdown, providing a risk-adjusted performance metric. A higher Calmar Ratio indicates better performance relative to the risk taken, suggesting that a trading strategy with a higher ratio may be more efficient.
However, it’s crucial to remember that the Calmar Ratio does not capture all types of risk, such as leverage risk, liquidity risk, and market risk, which can significantly affect a strategy’s risk profile. Therefore, while a higher Calmar Ratio is generally favorable, it should be used with other risk measures to gain a more comprehensive understanding of a trading strategy’s risk.
How can the Calmar Ratio help us decide if a trading strategy is worth pursuing?
The Calmar Ratio helps us evaluate if a trading strategy is worth pursuing by assessing the ratio of its average annual return to its maximum drawdown, providing insight into risk-adjusted returns.
The Calmar Ratio proves handy when determining the viability of a particular trading strategy. Providing a measure of risk-adjusted returns allows investors to see how much return a strategy has generated for each unit of risk taken. A higher Calmar Ratio indicates better performance relative to the risk taken, suggesting that a trading strategy with a higher ratio may be more efficient and worth pursuing.
However, it’s essential to remember that the Calmar Ratio does not capture all types of risk, and other factors should be considered. Therefore, while a higher Calmar Ratio is generally favorable, it should be used in tandem with other metrics and qualitative factors to make a well-rounded decision regarding the viability of a trading strategy.
Does a higher Calmar Ratio mean a trading strategy is less risky?
While a higher Calmar Ratio suggests potentially lower risk, it doesn’t guarantee it, as it only looks at the past and not into the future. An elevated Calmar Ratio reflects a trading strategy’s effectiveness in mitigating downside risk when weighed against its annualized return, implying enhanced performance once adjusted for risk.
Can the Calmar Ratio help us compare different trading strategies?
Yes, the Calmar Ratio can help compare different trading strategies by evaluating risk-adjusted returns over time. It can be a good asset when contrasting different trading strategies. Comparing the risk-adjusted performance of different trading strategies allows investors to evaluate the difference between funds and strategies.
A higher Calmar Ratio indicates better performance relative to the risk taken, suggesting that a trading strategy with a higher ratio may be more efficient than one with a lower value.
Does a low Calmar Ratio mean a trading strategy is too risky?
Yes, a low Calmar Ratio typically indicates that a trading strategy might be too risky, but not necessarily. While it may point to suboptimal returns when adjusted for risk, it doesn’t offer an exhaustive overview of the investment’s risk profile. The suitability of a low Calmar Ratio is heavily dependent on the personal risk preferences and investment objectives specific to each investor.
The Calmar Ratio should be considered alongside additional analytical instruments and methodologies for an enriched perspective on an investment’s performance relative to its associated risks.
How does the Calmar Ratio help us see if a trading strategy is affected by transaction costs?
The Calmar Ratio helps identify if transaction costs impact a trading strategy by considering both returns and drawdowns over time. If transaction costs significantly reduce returns, the Calmar Ratio will be lower, indicating potential inefficiencies in the strategy due to transaction expenses.
Transaction costs can significantly affect a trading strategy’s performance, and the Calmar Ratio can help illuminate this aspect. Transaction costs can affect both the annualized return and maximum drawdown components of the ratio.
A trading strategy with significant transaction costs might show a less favorable Calmar Ratio than one with lower costs, assuming similar gross performance. A sudden decrease in the Calmar Ratio could indicate that transaction costs are negatively impacting a trading strategy’s performance, affecting the annual rate of return.
Is the Calmar Ratio more suitable for short-term or long-term investors?
The Calmar Ratio is more suitable for long-term investors because it evaluates risk-adjusted returns over a longer period, typically over several years, making it more aligned with their investment horizon.
The Calmar Ratio measures risk-adjusted performance, showing the gains versus the risks of investments and strategies. This ratio particularly favors evaluations over extended periods because short periods may not fully capture the full extent of the risks.
How does the Calmar Ratio relate to volatility and drawdowns?
The Calmar Ratio relates to volatility and drawdowns by measuring the ratio of annualized return to maximum drawdown, providing insight into risk-adjusted performance.
With its exclusive focus on maximum drawdown as a measure of risk, the Calmar Ratio has a unique place among risk measures. It encapsulates downside risk and potential losses, whereas other metrics like the Sharpe Ratio take into account overall volatility. The ratio’s emphasis on maximum drawdown means it views risk regarding potential losses rather than overall volatility, making it more understandable for some investors.
However, its singular focus on drawdown means it provides a limited view of risk compared to other measures and ignores general market volatility, making it less statistically significant for certain analyses.
How does the Calmar Ratio help us compare trading strategies with different timeframes?
The Calmar Ratio helps us compare trading strategies with different timeframes by providing a standardized measure of risk-adjusted returns. This makes it easier to assess performance regardless of the strategy’s time horizon.
The Calmar Ratio compares risk-adjusted performance over different timeframes, offering insights into the consistency of funds’ returns. Typically anchored at 36 months, this measure facilitates standardized evaluations across disparate periods.
Who created the Calmar Ratio?
Terry W. Young created the Calmar Ratio. Terry W. Young introduced the investment community to the Calmar Ratio in 1991 while running his business, California Managed Accounts, and editing its newsletter, CMA Reports. The “Calmar” name originates from an abbreviation that combines California Managed Accounts with the word Reports.
Developed as a tool for evaluating a fund’s performance with greater immediacy than other indicators such as the Sharpe Ratio or Sterling Ratio – which are Calculated annually – the Calmar Ratio was designed by Young to be computed monthly. He posited that this more frequent calculation would result in a smoother and less reactive metric than the Sterling Ratio.
What is the difference between Calmar Ratio and Sortino Ratio?
The difference between the Calmar Ratio and the Sortino Ratio is how they measure risk-adjusted returns. While both assess risk, the Calmar ratio uses maximum drawdown, while the Sortino ratio considers downside deviation from the mean return.
While the Sharpe and Sortino Ratios both quantify risk-adjusted performance, they employ distinct methodologies. The Calmar Ratio zeroes in on maximum drawdown as its key measure of risk. In contrast, the Sortino Ratio is designed to assess downside risk by exclusively accounting for negative variations from an expected return.
Hence, the emphasis of the Calmar Ratio lies in assessing major potential setbacks in value, while Sortino Ratios concentrates specifically on evaluating fluctuations within adverse investment returns.
What is the difference between Calmar Ratio and Treynor Ratio?
The difference between the Calmar and Treynor ratios lies in the risk measures they utilize. While the Calmar ratio assesses risk using maximum drawdown, the Treynor ratio evaluates risk through beta, which measures the sensitivity of an investment’s returns to market movements.
The Calmar Ratio and the Treynor Ratio both serve as risk-adjusted performance metrics but employ different risk measures. The former considers maximum drawdown to quantify risk, while the latter uses beta or systematic risk to assess an investment’s risk-adjusted returns.
For assets or funds where a key consideration is mitigating substantial losses over a given period, the Calmar Ratio is particularly apt. Conversely, when evaluating well-diversified portfolios that have reduced unsystematic risks – or those unique to individual investments – the Treynor Ratio offers a more suitable framework by utilizing beta in gauging how an investment stacks up relative to market-wide performance.
What is the difference between Calmar Ratio and Jensen’s Alpha?
The Calmar Ratio and Jensen’s Alpha are metrics used in finance, but they measure different aspects of investment performance.
Although the Calmar Ratio and Jensen’s Alpha are metrics employed to gauge investment performance, they do so from different perspectives. The Calmar Ratio calculates risk-adjusted performance by dividing the annualized rate of return by an investment’s maximum drawdown. On the other hand, Jensen’s Alpha measures the excess returns earned by a portfolio compared to the projected returns of the Capital Asset Pricing Model (CAPM).
While the Calmar Ratio concerns the worst-case scenario and the maximum potential loss, Jensen’s Alpha assesses whether the returns generated were consistent with the risk taken to achieve the results.
How to calculate Calmar Ratio In Python?
To calculate the Calmar Ratio in Python, you can divide the annualized return by the maximum drawdown. Use historical data for returns and drawdowns, then apply the formula:
calmar_ratio = annualized_return / max_drawdown
Python, a widely used programming language in quantitative finance, can compute the Calmar Ratio. To do this, follow these steps:
- Import necessary libraries such as pandas_datareader.data for fetching stock data, numpy for numerical operations, and matplotlib for visualizing data.
- Use pandas_datareader.data to download the stock data within a specified date range from a financial data source such as ‘yahoo’.
- Perform the necessary calculations to compute the Calmar Ratio using the downloaded stock data.
Summary
In summary, the Calmar Ratio is a helpful tool for investors that allows for a unique perspective on risk and return. Focusing on maximum drawdown as a measure of risk provides a tangible and understandable measure of risk-adjusted performance.
While it has limitations and should be used with other metrics, it remains a valuable part of any investor’s toolkit because of its simplicity.