DEFINITION of 'KRatio'
A ratio that is used in the performance evaluation of an equity relative to its risk. The ratio examines the consistency of an equity's return over time. The data for the ratio is derived from a value added monthly index (VAMI), which tracks the progress of a $1,000 initial investment in the security being analyzed.
Calculated as:
BREAKING DOWN 'KRatio'
The Kratio was developed by Lars Kestner, a derivatives trader and statistician. The Kratio calculation involves running a linear regression on the logVAMI curve. The results of the regression are used subsequently in the Kratio formula. The slope is the return, while the standard error of the slope represents the risk. The ratio takes the return of the security over time, and it is considered a good tool to measure the performance of an equity.

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