What Is a MAR Ratio?
A MAR ratio is a size of returns adjusted for risk that can be used to check the potency of commodity purchasing and promoting advisors, hedge finances, and purchasing and promoting strategies. The MAR ratio is calculated by way of dividing the compound annual expansion charge (CAGR) of a fund or methodology since its inception by way of its maximum necessary drawdown. The higher the ratio, the easier the risk-adjusted returns.
The MAR ratio gets its name from the Managed Accounts Report newsletter, introduced in 1978 by way of Leon Rose, a author of various financial newsletters who complex this metric.
Key Takeaways
- The MAR ratio is a size of potency returns, adjusted for risk.
- The potency of commodity purchasing and promoting advisors, hedge finances, and purchasing and promoting strategies can all be in comparison by way of the use of a MAR ratio.
- To calculate the MAR ratio, divide the compound annual expansion charge (CAGR) of a fund or methodology since inception and then divide by way of its largest drawdown.
- Since the MAR ratio turns out at potency since inception, one among its drawbacks for comparisons is not taking into consideration the opposite timeframes finances or strategies were in existence.
- The Calmar ratio is each different ratio that measures the equivalent metrics alternatively instead best turns out at the earlier 36 months.
Understanding a MAR Ratio
The compound annual expansion charge is the speed of return of an investment from start to finish, with annual returns which could be reinvested. A drawdown of a fund or methodology is its worst potency right through the desired period of time.
For instance, in a given twelve months, say each month a fund had a return potency of 2% or additional, alternatively in one month it had a loss of 5%, the 5% would be the drawdown amount. The MAR ratio seeks to investigate the worst imaginable risk (drawdown) of a fund to its normal expansion. It standardizes a metric for potency comparison.
For instance, if Fund A has registered a compound annual expansion charge (CAGR) of 30% since inception, and has had a maximum drawdown of 15% in its history, its MAR ratio is 2. If Fund B has a CAGR of 35% and a maximum drawdown of 20%, its MAR ratio is 1.75. While Fund B has the following absolute expansion charge, on a risk-adjusted basis, Fund A may also be deemed to be superior as a result of its higher MAR ratio.
MAR Ratio vs. Calmar Ratio
On the other hand what if Fund B has been in existence for two decades and Fund A has best been working for five years? Fund B is at risk of have weathered additional market cycles by way of unique characteristic of its longer existence, while Fund A would perhaps best have operated in more favorable markets.
This can be a key problem of the MAR ratio as it compares results and drawdowns since inception, which might perhaps result in vastly differing periods and market must haves all over different finances and strategies.
This problem of the MAR ratio is triumph over by way of each different potency metric known as the Calmar ratio, which considers compound annual returns and drawdowns for the former 36 months best, moderately than since inception.
The MAR ratio and the Calmar ratio result in vastly different numbers given the period of time being analyzed. The Calmar ratio is most often a additional preferred ratio as it compares apples to apples when it comes to timeframe, due to this fact being a additional right kind representation of comparing multiple finances or strategies.
Other stylish ratios that overview potency to risk are the Sharpe ratio and the Sortino ratio.
