Sterling Ratio
Computes the Sterling ratio, a drawdown-adjusted performance measure. It divides return by a measure of how much the portfolio typically falls from peak to trough, rewarding strategies that deliver return without big drops. The tool shows two versions: the modern one, using excess return over the risk-free rate divided by the average drawdown, and the original Deane Sterling Jones form, which adds a ten percent constant to the denominator. Enter the annualized return, the risk-free rate and the average annual maximum drawdown.
Result
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Sterling Ratio
Computes the Sterling ratio, a drawdown-adjusted performance measure. It divides return by a measure of how much the portfolio typically falls from peak to trough, rewarding strategies that deliver return without big drops. The tool shows two versions: the modern one, using excess return over the risk-free rate divided by the average drawdown, and the original Deane Sterling Jones form, which adds a ten percent constant to the denominator. Enter the annualized return, the risk-free rate and the average annual maximum drawdown.
Return measured against the drops
Two funds with the same return can offer completely different experiences to the investor: one rises in a straight line, the other gets there after breathtaking falls. The Sterling ratio captures that difference by dividing return by a measure of drawdown, how much the portfolio typically falls from a peak to the next trough. It rewards those who deliver results without big scares.
Different versions circulate, and they don't give the same number. The original, from the Deane Sterling Jones firm, adds a ten percent constant to the drawdown in the denominator, on the idea that the worst fall is still to come. The modern version, more used today, takes excess return over the risk-free rate divided by the average drawdown, in the spirit of the Calmar ratio. The tool shows both so you don't confuse them.
Enter the annualized return, the risk-free rate and the average annual maximum drawdown as a positive magnitude. The tool returns both versions of the ratio. The higher the number, the better the return per unit of pain; comparing it across funds only makes sense using the same version and the same period throughout.
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The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.