by **Dacamic** » Fri Jan 28, 2011 10:36 pm

For normalizing returns, I prefer to define risk in terms of drawdowns rather than return volatility, and thus the Return Retracement Ratio is better suited to me. Since the Return Retracement Ratio calculation is portfolio-based, I sometimes use a crude derivative to help avoid the effects of portfolio bias: Monte Carlo Average Annual Return / Monte Carlo Average Drawdown.

Although they are based on different calculations and ideas, it is certainly possible that Return Retracement Ratio and Sharpe Ratio often bring people to the same conclusions in practice (I wouldn't be surprised if they did). So, please accept my thoughts only as my personal preference.

Regardless of my ramblings above, your point is well-taken; return must be considered in the context of its related risk (and vice versa).

Steve