How is the Sterling Ratio calculated?

The Sterling Ratio is calculated by dividing excess returns by the average annual drawdown. This financial metric is particularly useful for assessing a portfolio's risk-adjusted performance, especially in relation to the losses experienced during drawdowns.

To elaborate, excess returns are typically calculated as the returns above a risk-free rate, accounting for the additional risk taken by the investor. The average annual drawdown involves measuring the average percentage loss from a peak to a subsequent trough within a specified time frame, which provides insight into the potential losses faced by investors during downturns.

The Sterling Ratio provides a clear picture of how well an investment has performed relative to the risks of loss encountered, making it a valuable tool for portfolio managers and investors seeking to understand their risk-return trade-offs.