Calmar ratio
How do we judge whether a market's return is worth the worst fall it has taken?
In plain words
The Calmar ratio divides a return over a period by the largest peak-to-trough decline measured over that same period. It answers how much gain was earned per unit of worst-case pain, rather than how much gain there was on its own.
Why it matters
Two markets can post identical returns while one got there through a far deeper collapse. Return alone hides that difference. Comparing gain with the worst drawdown shows whether the reward was proportionate to the risk actually endured, which matters for sizing positions and choosing between markets.
In a real week: ETH, week of 25 March 2019
In the week of 25 March 2019, ETH rose 3.86%, closing at 141.38 after opening at 136.12, yet it remained 83.16% below its 52-week high. Set against that depth of decline, a gain of a few percent is modest. The Calmar ratio would express this same comparison as a single number.
A common mistake
Treating the Calmar ratio as a forecast, or comparing figures measured over different windows. It describes what a specific past period delivered relative to its own worst decline.