What is the 'Sterling Ratio'

Sterling ratio is a risk-adjusted return measure that uses compounded annual return over average maximum drawdown. There are multiple variations on this basic formula. The formula is as follows:

Formula for calculating the Sterling ratio.

The Sterling ratio formula uses the average compounded return and average risk presented in the form of maximum drawdown. Drawdown is calculated as the maximum potential loss in the given year. The resulting ratio shows the amount of average annual compounded return delivered per unit of average maximum drawdown risk. The higher quantity of return per unit of risk, the more favorable the result as the investor received each unit of return while experiencing a smoother ride.

BREAKING DOWN 'Sterling Ratio'

The Sterling ratio measures return over maximum drawdown. There are many ways the numbers can be adjusted before they are plugged into the formula. The ratio is often used in the context of hedge funds. The risk-reward measure determines which hedge funds have the highest returns while enduring the least amount of volatility. 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. Return Over Maximum Drawdown (RoMaD)

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

    The Calmar ratio compares the average annual compounded rate ...
  3. Sortino Ratio

    The Sortino ratio improves upon the Sharpe ratio by isolating ...
  4. Risk-Adjusted Return

    A risk-adjusted return takes into account the amount of risk ...
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  6. Accounting Ratio

    Accounting ratios, also known as financial ratios, are used to ...
Related Articles
  1. Investing

    Mitigating Downside With the Sortino Ratio

    Differentiate between good and bad volatility with the Sortino ratio.
  2. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
  3. Investing

    Wal-Mart's 5 Key Financial Ratios (WMT)

    Identify the five key financial ratios that fundamental analysts use to evaluate Wal-Mart's (WMT) financial position to determine if it is a good buy.
  4. Investing

    Useful metrics for evaluating bank stocks

    Learn which metrics are most useful to evaluate companies in the banking sector and the issues when comparing them across the various banks.
  5. Investing

    Four Steps To Manage A Downturn In The Market

    A few simple adjustments could end your losing streak as soon as it begins.
  6. Investing

    ETF Gross vs. Net Expense Ratios: How They Differ

    If you're going to invest in ETFs, you should know the intricacies of expense ratios.
RELATED FAQS
  1. What's the difference between a drawdown in banking and a drawdown in trading?

    Understand the different meanings of the term ''drawdown'' as it is applied within the contexts of trading and banking. Read Answer >>
  2. 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 >>
  3. 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 >>
  4. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >>
Trading Center