Sterling Ratio Formula
The Sterling ratio divides annualized return by the average of the yearly maximum drawdowns, with a fixed 10% added to the denominator as a conservatism penalty. By using average rather than single worst drawdown and adding the penalty, it produces a deliberately harsher figure than the Calmar ratio.
Formula
Copy the exact expression or work through it step by step below.
Sterling = CAGR / ( AvgAnnualMaxDrawdown + 10% )
AvgAnnualMaxDrawdown = (1/Y) x sum over years of |MaxDrawdown_year| Variables
CAGR
Compound annual growth rate
Annualized geometric return over the full track record.
AvgAnnualMaxDrawdown
Average annual maximum drawdown
The mean of each calendar year's largest peak-to-trough decline, taken as positive values. Averaging across years smooths out a single anomalous crash and rewards consistency.
Y
Number of years
Count of annual periods over which the per-year maximum drawdowns are averaged.
10%
Sterling penalty
A fixed constant added to the denominator in the original Deane Sterling Jones formulation. It guards against flattering ratios when drawdowns happen to be small in the sample, lowering the score relative to Calmar.
Step By Step
- 1
Compute the compound annual growth rate over the full track record.
Equity grows from 100 to 158 over 3 years: CAGR = (1.58)^(1/3) - 1 = 0.1648 = 16.48%.
- 2
Find the maximum drawdown within each calendar year separately, as positive numbers.
Year 1 worst drawdown 12%, year 2 18%, year 3 9%.
- 3
Average the per-year maximum drawdowns.
(12% + 18% + 9%) / 3 = 13%.
- 4
Add the fixed 10% penalty to the average drawdown, then divide CAGR by the result.
13% + 10% = 23%; 16.48% / 23% = 0.717.
Worked Example
CTA program over 3 calendar years
CAGR
16.48%
Annual max drawdowns
12%, 18%, 9%
Sterling penalty
10%
Average annual max drawdown = (0.12 + 0.18 + 0.09)/3 = 0.39/3 = 0.13. Add the 10% penalty: 0.13 + 0.10 = 0.23. Sterling = 0.1648 / 0.23 = 0.717.
Sterling ratio of about 0.72. On the same program a Calmar ratio (using only the single worst 18% drawdown and no penalty) would read 0.1648 / 0.18 = 0.92, which shows how the averaging and the fixed penalty make Sterling the more conservative measure.
Common Variations
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Sources & References
- Practical Portfolio Performance Measurement and Attribution — Carl R. Bacon, Wiley (2008)
- Managed Futures: An Investor's Guide — CME Group educational reference
Related Content
Keep the topic connected
Calmar Ratio Formula
The Calmar ratio formula: annualized return divided by maximum drawdown over the period. A drawdown-based risk-adjusted return with a worked example.
Maximum Drawdown Formula
The maximum drawdown formula: the largest peak-to-trough decline in an equity curve. The worst loss from a prior high, with a worked example.
CAGR Formula
The CAGR formula: the constant annual rate growing a beginning value to an ending value over n years. The true geometric return, with a worked example.
Drawdown
Drawdown explained: peak-to-trough decline, why max drawdown alone is misleading, and the recovery math that actually matters.