Performance & Risk Metrics
Sterling Ratio
A risk-adjusted performance metric that measures excess return per unit of average drawdown, used to evaluate strategy consistency and downside management in quant and insider-trading detection models.
The Sterling Ratio divides annualized excess return by the average annual maximum drawdown. Using the average of yearly worst-case losses, rather than a single all-time drawdown, makes it less sensitive to one freak event and more representative of what a typical bad year looks like. A higher ratio means more return per unit of recurring drawdown.
Where the Sharpe Ratio puts standard deviation in the denominator, the Sterling Ratio puts drawdown, so it speaks to investors who care about capital preservation rather than the smoothness of monthly returns. Definitions vary: some versions add a 10% constant to the average drawdown, so check the convention before comparing figures.
Formula
- R_\textexcess
- Annualized return in excess of a risk-free benchmark or baseline strategy
- \textAvgt(\textMax Drawdownt)
- Average of annual maximum peak-to-trough declines over the observation period