Sterling Ratio

DEFINITION of 'Sterling Ratio'

A ratio used mainly in the context of hedge funds. This risk-reward measure determines which hedge funds have the highest returns while enduring the least amount of volatility. The formula is as follows:

Sterling Ratio



This formula uses the average for risk (drawdown) and return over the past three years. Drawdown is calculated at the maximum potential loss in the given year.

BREAKING DOWN 'Sterling Ratio'

Just like the Calmar ratio, a higher Sterling ratio is generally better because it means that the investment(s) are receiving a higher return relative to risk.

The Sterling ratio is similar to the Sharpe ratio and the Sortino ratio, as it also produces a risk-adjusted return measurement. The Sterling ratio, along with the Sortino ratio, is primarily used by hedge funds as a way of advertising superior risk management.

RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, ...
  3. MAR Ratio

    A measurement of returns adjusted for risk that can be used to ...
  4. Return Over Maximum Drawdown (RoMaD)

    Return over Maximum Drawdown (RoMaD) is a risk-adjusted return ...
  5. Calmar Ratio

    A comparison of the average annual compounded rate of return ...
  6. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
Related Articles
  1. Trading

    How The Sharpe Ratio Can Oversimplify Risk

    When it comes to hedge funds, this measure is not reliable on its own.
  2. Investing

    What is the Sortino Ratio?

    By using the Sortino ratio, an investor can focus on the rate of return needed to reach a specific financial goal, such as saving for vacation or making a down payment on a home. It looks at ...
  3. Managing Wealth

    Mitigating Downside With The Sortino Ratio

    Differentiate between good and bad volatility with the Sortino Ratio.
  4. Markets

    3 Ways To Evaluate the Performance of Alternatives

    Learn about three ways to measure the performance of alternative investments. See how the commonly used Sharpe ratio has drawbacks in measuring volatility.
  5. Trading

    5 Ways To Rate Your Portfolio Manager

    Investopedia explains: These five performance ratios will help you measure how good your money manager is at increasing the value of your portfolio.
  6. Markets

    What's a Drawdown?

    A drawdown is usually expressed as a percentage change between the peak price and the low price (trough) of an investment.
  7. Markets

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  8. Investing

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  9. Managing Wealth

    Calculating the Risk/Reward Ratio

    Investors use risk/reward ratios to compare an investment’s expected return to the risk taken to capture those returns.
  10. Managing Wealth

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
RELATED FAQS
  1. What is the difference between a Sharpe ratio and a Sortino ratio

    Understand the differences between the Sharpe ratio and the Sortino ratio, two risk-adjusted return on investment calculations, ... Read Answer >>
  2. How do drawdowns help assess investment risk?

    Learn how the concepts of drawdowns and maximum drawdowns are used in the analysis of risk, as well as in the building of ... Read Answer >>
  3. What are the advantages and disadvantages of zero-based budgeting in accounting?

    Learn how the information ratio is calculated as a risk-adjusted measure of performance, and understand how it seeks to differentiate ... Read Answer >>
  4. How do stock dividends affect the retained earnings account?

    Understand the difference between financial ratio analysis and accounting ratio analysis. Learn why ratio analysis is important ... Read Answer >>
  5. What is the difference between efficiency ratios and profitability ratios?

    Learn about efficiency and profitability ratios, what these ratios measure and the main difference between efficiency and ... Read Answer >>
  6. What role does ratio analysis play in valuing a company?

    Learn about the role of ratio analysis in determining company value, including some of the most common ratios used by modern ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center