Calmar Ratio
Annualized return divided by maximum drawdown; emphasizes drawdown risk in backtesting.
Definition
Calmar ratio = (annualized return) / (maximum drawdown). Often computed over a rolling window (e.g. 36 months). Higher values indicate more return per unit of worst peak-to-trough loss.
Why it matters for backtesting
- Drawdown focus: Directly penalizes strategies that spend long periods underwater.
- Practical risk: Many investors care more about max drawdown than volatility.
- Complement to Sharpe: A strategy can have a decent Sharpe but a poor Calmar if drawdowns are long or deep.
Limitations
- Depends on the lookback window; one bad drawdown can dominate.
- Single number; does not show drawdown duration or recovery path.
- Sensitive to the start/end of the sample.
Linked concepts
Max drawdown, Sharpe ratio, recovery factor, ulcer index.