InsidersTradesSigma
Performance & Risk Metrics
A downside risk metric that measures average drawdown experienced by an investment relative to its excess return, penalizing strategies for sustained periods of underwater performance.
The Pain Ratio divides excess return (return above the risk-free rate) by the sum of all drawdowns over the period. Where maximum drawdown captures only the single worst loss, the Pain Ratio adds up the depth and duration of every underwater stretch. It therefore favours strategies that recover quickly over those that spend long spells below their high-water mark.
The Pain Ratio is closely related to the Ulcer Index, which uses the same idea of cumulative drawdown in its denominator. Two strategies can post the same average return yet score very differently here: the one that ground through many small consecutive losses takes the lower ratio, even if its single worst drawdown was modest.
Formula