Sterling Ratio

A return/risk ratio. The return (numerator) is defined as the compound annualized return over the last 3 years, and the risk (denominator) is defined as the average yearly maximum drawdown over the last 3 years, less an arbitrary 10%. To calculate the average yearly drawdown, the latest 3-year returns (36 months) are divided into 3 separate 12-month periods, and the maximum drawdown is calculated for each. These 3 drawdowns are then averaged to produce the average yearly maximum drawdown for the 3-year period. (If there are not 3 years of data, the available data is used.)

Sterling Ratio

Investors who are required to select and monitor investment managers should develop a basic understanding of investment statistics. Quantitative tools can provide you with good insight that you can use in your qualitative interviews with managers and when monitoring your investments.