Performance Ratios Glossary
Adj Net Prft/Largest Loss - The Adjusted Net Profit divided by the Largest Losing Trade value.
Adj Net Prft/Max Trade Drawdown - The Adjusted Net Profit divided by the Maximum Trade Drawdown during the test period.
Adj Net Prft/Max Strategy Drawdown - The Adjusted Net Profit divided by the Maximum Strategy Drawdown during the test period.
Fouse Ratio - A measure of risk-adjusted performance that accommodates different degrees of risk aversion. It indicates the net return earned after subtracting the risk premium that corresponds to the investor's risk tolerance and choice of risk measure . The Fouse DD index uses downside deviation as the risk measure.
Where
- MR = average return for period (monthly),
- RT = risk tolerance (you set the risk tolerance as Degree of risk aversion of the investor in the Financial Settings tab of the Settings dialog box),
- DD = downside deviation.
For a complete discussion of this topic see Sortino, F.A. and Price, L. N.; (1994).
Net Prft/Largest Loss - The total net profit divided by the largest losing trade value.
Net Profit/Max Trade DrawDown - The Total Net Profit divided by Maximum Trade Drawdown.
Net Prft/Max Strategy Drawdown - The net Total Net Profit divided by maximum strategy drawdown during the period.
Sharp Ratio - Nobel Laureate William Sharpe introduced the Sharpe Ratio, in 1966, under the name reward-to-variability ratio. This ratio is perhaps the best known of the return to risk measures. The formula for the Sharpe ratio is SR = (MRi*RFR) / SD, where MRi is the average return for period (monthly), RFR is the risk-free rate of return. You set the RFR as Interest rate in the Financial Settings tab of the Settings dialog box. SD is the standard deviation of returns. Thus, this formula yields a value that could be loosely defined as return per unit risked if we accept the premise that variability is risk. The higher Sharpe ratio the smoother the equity curve on a monthly basis. Having a smooth equity curve is a very important objective for many traders. That is why this ratio is widely used both at an individual market and at a portfolio level.
Sortino Ratio - In addition to the Sharpe ratio we also calculate several risk-adjusted performance measures that are not based on the standard deviation. A common characteristic of these alternative performance measures is the use of so-called downside deviation with respect to a reference point. The reference point, which may also be called the minimal acceptable rate of return, is used to distinguish "risk" from "volatility". According to Sortino and Van der Meer (1991), realizations above the reference point imply that goals are accomplished and, therefore, are considered "good volatility". Realizations below the reference point imply failure to accomplish the goals and should be considered "bad volatility" or risk. Based on this premise, report calculates the Sortino ratio, the Fouse-index, and the upside-potential ratio.
The Sortino ratio is probably the most well-known measure, and it is calculated as follows: Sortino=(MRMAR)/DD.
MR is the average return for period (monthly). MAR is the minimal acceptable rate of return. You set the Minimal Acceptable Rate of Return in the Financial Settings tab of the Settings dialog box. DD is the downside risk with respect to the minimal acceptable rate of return.
Upside Potential Ratio - The Sortino Ratio and the Fouse index rely on the use of expected return and downside risk. Expected return is used as a measure of the potential reward of an investment opportunity. An alternative for using the expected return is the so-called upside potential ratio, which is the probability weighted average of returns above the reference rate. The upside potential ratio was developed by Sortino, Van der Meer, and Plantinga [1999].
It is calculated as follows:
Where
- N - number of months in test period,
- T(POS) = 1 if MRi > Rmar and T(POS) = 0 if MRi =< Rmar
- T(NEG) = 1 if MRi =< Rmar and T(NEG) = 0 if MRi > Rmar
An important advantage of using the Upside Potential Ratio rather than the Sortino ratio is the consistency in the use of the reference rate for evaluating both profits and losses.