Return over maximum drawdown (RoMaD) is a metric used to assess the risk-adjusted performance of a portfolio. It is calculated as the ratio of the portfolio's annualized return to its maximum drawdown.
A high RoMaD indicates that the portfolio has performed well relative to its downside risk. For example, a portfolio with an annualized return of 10% and a maximum drawdown of 20% would have a RoMaD of 0.5.
RoMaD is a useful metric for comparing the performance of different portfolios, as it takes into account both the return and the risk of the portfolios.
There are a few things to keep in mind when interpreting RoMaD:
-A higher RoMaD is not necessarily better. A portfolio with a higher RoMaD may be riskier than a portfolio with a lower RoMaD.
-RoMaD should not be used as the sole criterion for choosing a portfolio. Other factors, such as the expected return and the volatility of the portfolio, should also be considered.
-RoMaD is affected by the time period over which it is calculated. A longer time period will usually result in a higher RoMaD.
What is financial information ratio?
Financial information ratio (FIR) is a risk-adjusted performance measure used to evaluate the relative ability of a portfolio manager to generate consistent alpha.
The formula for calculating FIR is:
(Average Value of Annual Alpha / Standard Deviation of Annual Alpha) x (Square Root of Number of Years in Measurement Period)
A high FIR indicates that a manager has generated a higher return per unit of risk over the specified period, and is therefore more likely to continue to do so in the future.
FIR can be used to compare the performance of different managers, or to assess the performance of a single manager over time.
How is Treynor measured?
Treynor is a risk-adjusted performance measure that was developed by Jack Treynor in the 1960s. It is similar to the Sharpe ratio, but instead of using the standard deviation of return as the measure of risk, it uses beta.
Treynor's measure is calculated as the excess return of the portfolio over the risk-free rate, divided by the portfolio's beta.
Excess return is the return of the portfolio above the risk-free rate.
The risk-free rate is the return on an investment with no risk. For example, the risk-free rate in the United States is currently the return on Treasury bills.
Beta is a measure of the volatility of a security or portfolio in relation to the market as a whole. A beta of 1.0 means that the security or portfolio is as volatile as the market. A beta of less than 1.0 means that the security or portfolio is less volatile than the market, and a beta of greater than 1.0 means that the security or portfolio is more volatile than the market.
Treynor's measure is sometimes referred to as the "reward-to-volatility ratio" because it is a ratio of the excess return to the beta.
A high Treynor ratio indicates that the portfolio has generated high returns for the amount of risk that it has taken. A low Treynor ratio indicates that the portfolio has taken on more risk than is necessary to generate the returns that it has achieved.
Treynor's measure can be used to compare the performance of different portfolios. It is also useful in determining whether a portfolio is overweighted in volatile stocks.
The Treynor ratio is calculated as follows:
Treynor ratio = (Excess return / Beta)
where:
Excess return = Return of the portfolio - Risk-free rate
Beta = Volatility of the portfolio
How is Sortino ratio different from Sharpe ratio? The Sortino ratio is a modification of the Sharpe ratio that takes into account only those returns that fall below a user-specified target.
The Sharpe ratio is a measure of risk-adjusted return, which reward excess return over a risk-free rate, regardless of the direction.
The Sortino ratio only penalizes downside risk, and thus may be a more accurate measure for investors who are concerned with minimizing losses. How do you measure drawdown? The maximum drawdown is the peak-to-trough decline during a specific time period of an investment, fund, or commodity.
There are several ways to measure drawdown. One way is to calculate the percentage drop from the highest peak to the lowest trough. Another way is to calculate the absolute dollar amount of the decline from the highest peak to the lowest trough.
The maximum drawdown can be a useful metric for assessing the risk of an investment. It can also help investors to identify periods of market stress and decide when to take action to protect their investment portfolios.
What is equity drawdown?
Drawdown is defined as the peak-to-trough decline during a specific period for an investment, portfolio, or benchmark.
There are two types of equity drawdown:
1. Intra-day drawdown: The largest peak-to-trough decline in value during a single trading day.
2. Inter-day drawdown: The largest peak-to-trough decline in value over a period of days, weeks, or months.
The intra-day equity drawdown is the more common of the two and is typically used to measure risk.
Inter-day equity drawdowns are more severe and can indicate a longer-term problem with the investment.
Drawdowns can be measured in absolute terms (e.g., $100) or as a percentage of the peak value (e.g., 10%).
A drawdown can also be referred to as a loss.