Calmar Ratio
A risk-adjusted return metric dividing an investment's average annual return by its maximum drawdown, specifically focused on return relative to the worst historical loss experienced.
The Calmar Ratio measures risk-adjusted return by dividing an investment's average annual return by its maximum drawdown (see Kaavon's "Maximum Drawdown" glossary definition) over the same period, producing a figure focused specifically on how much return was generated relative to the single worst peak-to-trough loss an investor would have had to endure along the way. A higher Calmar Ratio means the investment generated more return relative to its worst historical drawdown.
The Calmar Ratio is distinguished from the Sharpe Ratio (see Kaavon's "Sharpe Ratio" glossary definition) and Sortino Ratio (see Kaavon's "Sortino Ratio" glossary definition) by its specific focus on maximum drawdown rather than standard deviation or downside deviation — some investors consider this more intuitively meaningful, since maximum drawdown directly reflects the single worst psychological and financial experience an investor actually lived through, rather than a more abstract statistical measure of volatility.
Examples
- An investment with strong average annual returns but a historically severe maximum drawdown would show a lower Calmar Ratio than one with similar returns but a much milder worst-case drawdown.
- The Calmar Ratio's specific focus on maximum drawdown makes it particularly relevant to investors who care most about avoiding the single worst peak-to-trough loss they might have to endure.