We covered the Sharpe Ratio in part 1 of this Risk Adjusted Return series, which is one of the most widely used metrics within the financial industry. It's calculated by dividing the rate of return of an investment by the standard deviation of those returns. This gives a better estimate of the true performance and long-term viability of an investment because it factors in the level of risk.
But there is one glaring weakness of the Sharpe Ratio: It treats positive and negative deviation of results equally. Mathematically that may make sense, but in a practical real world setting, nobody fears positive deviation from the mean when it comes to investment results. The positive results are what we want right?
Enter the Ulcer Performance Index:
This is one of my favourite risk adjusted return metrics because it only factors in the volatility of negative investment returns, hence the name "Ulcer" Performance index. The negative months are the ones that worry us, and the UPI takes into account the magnitude and duration of drawdowns only.
Claim your FREE trial to the VTS Total Portfolio Solution:
https://www.volatilitytradingstrategies.com/subscribe
Follow me on Twitter:
https://twitter.com/VolatilityVIX
Brent Osachoff , volatility trading strategies, VTS , VTS options, volatility trading , Volatility ETPs, options trading , investing , stock market, VIX, VXX, UVXY