Ratios✓ Mathematical
◆ The PatternSharpe, Sortino, Calmar — normalize returns by the risk taken
Raw returns are misleading without context. Risk-adjusted ratios level the playing field:
| Ratio | Formula | Risk measure |
|---|---|---|
| Sharpe | (Rp−Rf)/σ | Total volatility |
| Sortino | (Rp−Rf)/σdown | Downside deviation |
| Calmar | CAGR / Max DD | Max drawdown |
| Treynor | (Rp−Rf)/β | Market beta |
| Information | α / TE | Tracking error |
Sharpe > 1 is good, > 2 is excellent, > 3 is suspicious (likely overfitting or illiquidity premium). Sortino is preferred for asymmetric return distributions since it penalizes only downside.
// Risk-adjusted performance ratios
Pattern bridge: Standard deviation and downside deviation connect to The Toolkit — Variance.