The Sharpe Ratio of reward-to-variability ratio measures excess return per unit of risk (standard deviation) in an investment asset vehicle or investment/trading strategy. The mathematical definition of the Sharpe ratio is:
= portfolio return
= risk-free rate
= standard deviation of portfolio returns
The Sharpe ratio describes how well the return of an asset/trading strategy compensates the investor for the risk taken. When comparing two trading strategies between them, or versus a common benchmark, the one with higher Sharpe ratio provides better return for the same risk (or, equivalently, the same return for lower risk).
Drawdown refers to the intensity of reduction of capital, in percentage or absolute terms, and may be referred to a single order or entire trading strategy. Absolute Drawdown is defined as the maximum loss as percentage of initial deposit by a trader. The feature of Absolute Drawdown is that the variation, instead of being related to the capital reached before the negative variation, is related to the initial equity deposit and is a measure of the difference between the original deposit and the lowest value (less the initial deposit) presented as a percentage for a specified period of time.
Maximum drawdown is the peak to through drop during a specific time for a single order or entire trading strategy, displayed in percentage or absolute terms. It displays the greatest loss from the previous highest equity, and provides information on the worst-case one can expect and an estimate of the maximum loss possible over a period of time.
Calmar ratio is a performance measurement that captures the risk of the investor’s strategy. It is defined as the average annual compound rate divided by the maximum drawdown incurred to date. The lower the Calmar ratio, the worse the trader performed on a risk adjusted basis over a specific time period.