Rachev ratio

The Rachev Ratio (or R-Ratio) is a risk-return performance measure of an investment asset, portfolio, or strategy. It was devised by Svetlozar Rachev and is designed to measure the right tail reward potential relative to the left tail risk in a non-Gaussian setting.[1][2][3] Intuitively, it represents the potential for extreme positive returns compared to the risk of extreme losses (negative returns), at a rarity frequency q (quantile level) defined by the user.[4]

The ratio is defined as the Expected Tail Return (ETR) in the best q% cases divided by the Expected tail loss (ETL) in the worst q% cases. The ETL is the average loss that you make when your losses exceed the Value at Risk at the quantile level you defined. The ETR, defined by symmetry to the ETL, is the average profit you make when your profits exceed the Profit at risk at the quantile level you defined.

See also

References

  1. ↑ Fehr, Ben. "Beyond the Normal Distribution" (PDF). Frankfurter Allgemeine Zeitung. Retrieved 16 March 2006.
  2. ↑ Cheridito, P.; Kromer, E. (2013). "Reward-Risk Ratios". Journal of Investment Strategies. 3 (1): 1–16.
  3. ↑ Farinelli, S.; Ferreira, M.; Rossello, D.; Thoeny, M.; Tibiletti, L. (2008). "Beyond Sharpe ratio: Optimal asset allocation using different performance ratios". Journal of Banking and Finance. 32 (10): 2057–2063. doi:10.1016/j.jbankfin.2007.12.026.
  4. ↑ https://statistik.econ.kit.edu/download/doc_secure1/10_StochModels.pdf


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