Risk-Adjusted Performance Metrics

Risk-Adjusted Performance Metrics

Raw returns don't tell the full story. Risk-adjusted metrics reveal whether a strategy compensates you adequately for the risk taken.

Information Ratio (IR)

The IR measures a portfolio's active return per unit of active risk vs a benchmark:

IR = mean(active_returns) / std(active_returns) × sqrt(252)

Where active_returns[i] = portfolio_return[i] - benchmark_return[i].

The sqrt(252) annualizes a daily IR (252 trading days per year).

Calmar Ratio

Measures annualized return divided by maximum drawdown:

Calmar = annual_return / |max_drawdown_pct|

A Calmar of 2.0 means you earn twice your worst drawdown each year.

Sample Standard Deviation

Use n - 1 in the denominator (Bessel's correction):

std = sqrt(Σ(x - mean)² / (n - 1))

Example

Calmar ratio = 0.15 / 0.25 = 0.6
(15% annual return with 25% max drawdown)