K-Ratio

AAA

DEFINITION of 'K-Ratio'

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:

K-Ratio

INVESTOPEDIA EXPLAINS 'K-Ratio'

The K-ratio was developed by Lars Kestner, a derivatives trader and statistician. The K-ratio calculation involves running a linear regression on the log-VAMI curve. The results of the regression are used subsequently in the K-ratio 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.

RELATED TERMS
  1. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  3. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  4. Return

    The gain or loss of a security in a particular period. The return ...
  5. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  6. Risk

    The chance that an investment's actual return will be different ...
RELATED FAQS
  1. What is a "linear" exposure in Value at Risk (VaR) calculation?

    A linear exposure in the value-at-risk, or VaR, calculation is represented by positions in stocks, bonds, commodities or ... Read Full Answer >>
  2. What is the criteria for a simple random sample?

    Simple random sampling is the most basic form of sampling and can be a component of more precise, more complex sampling methods. ... Read Full Answer >>
  3. What are some examples of ways that sensitivity analysis can be used?

    Sensitivity analysis is an analysis method that is used to identify how much variations in the input values for a given variable ... Read Full Answer >>
  4. What are the benefits of using ceteris paribus assumptions in economics?

    Most, though not all, economists rely on ceteris paribus conditions to build and test economic models. The reason they do ... Read Full Answer >>
  5. How is the 80-20 rule (Pareto's Principle) used in macroeconomics?

    The 80-20 rule was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century, ... Read Full Answer >>
  6. What are some of the uses of the coefficient of variation (COV)?

    In statistics, the coefficient of variation (COV) is a simple measure of relative event dispersion. It is equal to the ratio ... Read Full Answer >>
Related Articles
  1. Markets

    The Uses And Limits Of Volatility

    Check out how the assumptions of theoretical risk models compare to actual market performance.
  2. Investing Basics

    Determining Risk And The Risk Pyramid

    Many investors do not understand how to determine the risk level their individual portfolios should bear.
  3. Mutual Funds & ETFs

    Understanding Volatility Measurements

    How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more!
  4. Economics

    How to Do a Cost-Benefit Analysis

    The benefits of a given situation or business-related action are summed and then the costs associated with taking that action are subtracted.
  5. Fundamental Analysis

    Calculating the Herfindahl-Hirschman Index (HHI)

    The Herfindhal-Hirschman Index, (HHI) is a measure of market concentration and competition among market participants.
  6. Fundamental Analysis

    Calculating Net Interest Margin

    Net interest margin is a metric used to measure the effectiveness of a company’s investment decisions, particularly financial institutions.
  7. Investing

    How To Implement A Smart Beta Investing Strategy

    Smart beta investing is the notion of re-writing investment rules to improve investment outcomes by targeting exposures to intuitive ideas or factors.
  8. Economics

    Why The U.S. Economy Is Ready For Liftoff

    Though the U.S. economy is once again underperforming expectations, as it has for the past five years, the economy is ready for a (Fed) interest rate hike.
  9. Fundamental Analysis

    Calculating Book Value of Equity Per Share (BVPS)

    Book value of equity per share compares the total shareholder equity, as stated in the company’s balance sheet, to the total number of shares outstanding.
  10. Fundamental Analysis

    How to Calculate a Combined Ratio

    Combined ratio is a formula used in the insurance industry to measure the performance of an insurance company.

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center