Calmar Ratio - Explained
What is the Calmar Ratio?
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Table of ContentsWhat is the Calmar Ratio?How Does the Calmar Ratio Work?Academic Research on Calmer Ratio
What is the Calmar Ratio?
The Calmar ratio refers to a formula used in measuring the performance of a fund by comparing the annual compounded rate of return and the maximum drawdown risk of the fund. The Calmar ratio is often used to evaluate hedge funds and Commodity Trading Advisors. This ratio assesses the performance of a fund as well as its risks. The Calmar ratio calculates the average annual rate of return of a fund for a specified time and divides the figure realized by the maximum drawdown of the fund. When the ratio is low, it means the fund performed badly over a specific time based on its risk-adjusted basis. If the Calmar ratio is high, the fund performed better.
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How Does the Calmar Ratio Work?
Terry W. Young developed the Calmar ratio in 1991, it is a performance measurement used to assess Commodity Trading Advisors and hedge funds. The Calmar ratio is an appellate for the California Managed AccountsReports. This performance measurement ratio helps investors determine the risks of investments before undertaking them. The Calmar ratio is not the same as the MAR ratio, while the former uses a short-term data (mostly a period of three years), MAR ratio considers data emanating from when the investment is initiated. Risk-adjusted basis is crucial when assessing the performance of an investment using the Calmar ratio. Due to its consideration for risk-adjusted, the Calmar ratio has gained prominence amongst other performance measure ratios. When calculating the calmar ratio of funds, a time frame of three years is often used, although, the period can be more than three years or less in some cases. Investors are able to evaluate both the risks and returns of an investment as they contribute to the overall performance of the investment. Examples of other performance measure ratios are the MAR ratio, Sortino ratio and Sharpe tration.