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. Investing

    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. Investing

    Mitigating Downside With The Sortino Ratio

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

    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. Investing

    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. Investing

    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. Investing

    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. Investing

    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. Investing

    Hedge Funds: Higher Returns Or Just High Fees?

    Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one.
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. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  2. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  3. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  4. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule ...
Trading Center