FAQ Section | Frequently Asked Questions

The Sharpe ratio measures how much excess return a strategy achieves in relation to its volatility. It answers the question of whether a performance was bought efficiently or merely volatile.

Why is the Sharpe Ratio a T3 KPI? 
The Sharpe Ratio is not a simple performance indicator, but a standardized efficiency measure that: 

• combines several key figures 
• makes statistical assumptions 
• enables comparability across strategies 

It therefore requires an understanding of the model and is therefore clearly T3. 

On which measurement dimension is the Sharpe Ratio considered?  
The Sharpe Ratio is primarily meaningful at: 

• Strategy level  
• Portfolio level

The measurement dimensions are explained in the section "Measurement dimensions of KPIs". 

What does the Sharpe Ratio measure specifically? 
The Sharpe Ratio relates the following variables: 

:: (Average return - risk-free interest rate) ↔ Volatility of returns 

It measures how much return was achieved per unit of fluctuation. 

Example 

• Average return: +10% 
• Risk-free interest rate: +2% 
• Volatility: 8% 

→ Sharpe Ratio = 1.0 

Classification: 
For every unit of risk, one unit of excess return was achieved. 

How to classify the Sharpe Ratio correctly? 

• High Sharpe Ratio → efficient, stable return 
• Low Sharpe Ratio → return strongly driven by fluctuations 

Important: The Sharpe Ratio measures efficiency, not absolute performance. 

Typical misinterpretation 
A high Sharpe ratio automatically means a good strategy. 

Why this is not true: 

• The Sharpe Ratio only takes into account volatility, not drawdowns 
• Positive and negative fluctuations are treated equally 
• Extreme events can be distorted 

It is therefore not a complete measure of risk. 

Interaction with other KPIs 
The Sharpe Ratio should always be considered together with: 

• Maximum Drawdown (T1) 
• Time under Water (T2) 
• Downside Volatility (T2) 

Only this combination separates stable efficiency from statistical smoothing. 

Short conclusion 
The Sharpe Ratio answers the question: How efficiently were returns achieved in relation to fluctuations? It is a powerful analytical tool - provided its assumptions are understood.

The Sortino Ratio measures the excess return in relation to negative fluctuations. In contrast to the Sharpe Ratio, only losses are considered a risk.

Why is the Sortino Ratio a T3 KPI? 
The Sortino Ratio is also a normalized efficiency measure, but with: 

• a more targeted risk definition 
• a stronger model assumption 
• a higher interpretation requirement 

Thus, it is clearly T3. 

On which measurement dimension is the Sortino Ratio considered 
Primarily on: 

• Strategy level 
• Portfolio level 

What does the Sortino Ratio actually measure? 
Measured is: 
:: (Average return - target return) ↔ Downside Volatility 

It answers the question of how efficiently a strategy avoids losses, not how much it fluctuates.

Example 
Two strategies with identical performance and volatility: 

• Strategy A: few, controlled losses 
• Strategy B: frequent, deep losses 

→ Strategy A has a higher Sortino Ratio 

How should the Sortino Ratio be classified correctly? 
The Sortino Ratio is particularly suitable for: 

• asymmetric strategies 
• trending models 
• strategies with rare but deep losses 

It is closer to the real perception of risk than the Sharpe Ratio. 

Typical misinterpretation 
Sortino is always better than Sharpe. 

Why this is not true: 
The Sortino Ratio is also model-dependent and sensitive to the choice of data and time period. 

Short conclusion 
The Sortino Ratio answers the question: How efficiently is a return achieved if only losses count as risk?

The Ulcer Index measures the depth and duration of drawdowns over time. In contrast to volatility, it only takes into account negative deviations from the previous high. The focus is not on fluctuations, but on sustained loss stress.

Why is the Ulcer Index a T3 KPI? 
The Ulcer Index is based on a non-linear evaluation of drawdowns and: 

• combines depth and duration 
• does not use symmetrical risk definitions 
• requires explanation and is model-driven 

It is therefore primarily used in professional risk analyses and is clearly T3. 

On which measurement dimension is the Ulcer Index considered? 
The Ulcer Index unfolds its informative value at: 

• Portfolio level  
• Strategy level  

See section "Measurement dimensions of KPIs". 

What exactly does the Ulcer Index measure?  
Measured is: 
:: Square deviation of all drawdowns from the last peak over the period under consideration

 This means that deep and long drawdowns are disproportionately weighted. 

Example 
Two strategies achieve identical performance and volatility: 

• Strategy A: short, deep drawdown 
• Strategy B: several moderate, long drawdowns 

→ Strategy B has a higher Ulcer Index, as the stress over time is greater. 

How should the ulcer index be classified correctly? 

• Low Ulcer Index 
  → low, short or infrequent drawdowns 
• High Ulcer Index 
  → persistent or deep loss phases 

The Ulcer Index correlates strongly with the psychological stress of a strategy. 

Typical misinterpretation 
A low Ulcer Index means low risks. 

Why this is not true: 
The Ulcer Index measures loss stress, not extreme risks or tail events. It does not replace traditional risk analysis. 

Interaction with other KPIs 
The Ulcer Index should be considered together with: 

• Maximum Drawdown (T1) 
• Time under Water (T2) 
• Sortino Ratio (T3) 

This creates a complete picture of depth, duration and efficiency. 

Summary 
The Ulcer Index answers the question: How stressful were the loss phases over time? It is one of the most realistic risk measures for long-term strategies.

The Calmar Ratio puts the annual performance in relation to the maximum drawdown. It measures how much return was achieved per unit of maximum risk taken. 

Why is the Calmar Ratio a T3 KPI? 
The Calmar Ratio is: 

• normalized 
• comparative 
• drawdown-focused 

It combines T1 earnings ratios with T1 risk ratios to create a model-based efficiency measure.

On which measurement dimension is the Calmar Ratio considered? 
Primarily on: 

• Strategy level  
• Portfolio level  

What does the Calmar Ratio measure specifically? 
The following ratio is measured: 

:: Annual performance ↔ maximum drawdown 

It answers the question of how efficiently a risk was compensated in the long term. 

Example

• Annual performance: +18% 
• Maximum drawdown: -9% 

→ Calmar ratio = 2.0 

Classification: 
For every unit of maximum loss, two units of return were achieved. 

How to classify the Calmar Ratio correctly 

• High Calmar Ratio 
  → good ratio of return to drawdown 
• Low Calmar Ratio 
  → inefficient or risky return profile 

It is particularly suitable for trend-following and long-term strategies. 

Typical misinterpretation 
A high Calmar Ratio guarantees low risks 

Why this is not true: 
The Calmar Ratio only takes into account the worst historical drawdown, not its duration or frequency. 

Interaction with other KPIs 
The Calmar Ratio unfolds its full significance in interaction with: 

• Ulcer Index (T3) 
• Drawdown Duration (T2) 
• Recovery Factor (T2) 

This reveals whether a good value came about structurally or by chance. 

Short conclusion 
The Calmar Ratio answers the question: How efficiently was the maximum risk taken remunerated? It is a powerful comparative tool - provided its limits are known.

The Omega Ratio is a distribution-based efficiency ratio that takes into account all returns above and below a defined target return. In contrast to Sharpe, Sortino or Calmar, it does not only consider mean values or extreme points, but the entire return distribution. 

Why is the Omega Ratio a T3 KPI? 
The Omega Ratio is clearly T3 because it: 

• is based on complete return distributions 
• assumes an explicit target return 
• does not use linear simplification 
• depends heavily on data quality, time period and threshold 

It is highly meaningful, but also sensitive to interpretation. 

On which measurement dimension is the omega ratio considered? 
The omega ratio is primarily meaningful at: 

• Strategy level  
• Portfolio level  

The measurement dimensions are defined in the section "Measurement dimensions of KPIs". 

What exactly does the Omega Ratio measure? 
The ratio of: 
:: Probability and amount of positive returns above a target return 
:: ↔ 
:: Probability and magnitude of negative returns below this target return 

Simplified: 
How much "good" return is in relation to "bad" return? 

Example 
Target return: 0% 

• Strategy A: 
  • many small gains 
  • few but deep losses 
• Strategy B: 
  • even distribution 
  • moderate losses 

→ Despite similar performance, Strategy B may have a higher Omega Ratio because the negative distribution is more favorable. 

How should the omega ratio be classified correctly? 

• High Omega Ratio 
  → favorable return distribution above the target return 
• Low Omega Ratio 
  → negative outliers dominate the distribution 

The Omega Ratio is particularly suitable for: asymmetric strategies strategies with "fat tails" models with rare extreme events 

Typical misinterpretation 
A high Omega Ratio automatically means low risks. 

Why this is not true: 
The statement depends entirely on the chosen target return. A poorly chosen threshold can distort the result. 

Interaction with other KPIs 
The Omega Ratio should be considered together with: 

• Ulcer Index (T3) 
• Sortino Ratio (T3) 
• Drawdown Duration (T2) 

This shows whether a "good distribution" is also resilient. 

Short conclusion 
The omega ratio answers the question: How favorable is the overall return distribution relative to a defined target? It is one of the most complete measures of efficiency - while at the same time being highly complex.

T3 KPIs are based on models, assumptions and target definitions. Different key figures deliberately weight risk, time, fluctuation and extreme events differently 

There is therefore no "best" ranking - only suitable perspectives 

What assumptions influence T3 KPIs? 

• Choice of observation period 
• Definition of risk (volatility, drawdown, downside) 
• Target returns or reference values 
• Data frequency and quality 

Even small changes can lead to significantly different results. 

Why are contradictory results not a mistake 
Different T3 KPIs answer different questions: 

• Sharpe: Efficiency vs. volatility 
• Sortino: Efficiency vs. losses 
• Ulcer Index: Drawdown stress 
• Calmar: Return vs. Maximum risk 
• Omega: Distribution quality 

Contradictions do not show weakness, but multidimensionality 

What is the right way to deal with T3 KPIs 
T3 KPIs are analytical tools, not judgments. Their added value comes from: 

• Combining several KPIs 
• Comparing them with T1 and T2 KPIs 
• Contextualizing them to the strategy idea 

Short conclusion 
T3 KPIs help to understand strategies more deeply, not to evaluate them across the board.