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Formula, in Risk & Portfolio Construction

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.

4 variables. Published May 26, 2026. By AI Fin Hub Research.

Formula
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. 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. 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. 3

    Average the per-year maximum drawdowns.

    (12% + 18% + 9%) / 3 = 13%.

  4. 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

Calmar ratio: uses the single maximum drawdown over the window with no penalty term, giving a higher figure.
Sterling-Calmar ratio: a hybrid that uses average annual drawdown but drops the 10% penalty.
Some data providers omit the 10% constant entirely; always confirm which convention a reported Sterling ratio uses before comparing across sources.

Run the numbers next

  • Calculators Drawdown-Recovery Markov Simulator

    Time to recover from an N% drawdown given monthly Sharpe + skew + kurtosis. Cornish-Fisher Monte Carlo, percentile distribution of recovery months.

  • Calculators Returns Distribution Analyzer

    Paste a returns CSV. Histogram, normal QQ plot, skewness, excess kurtosis, Jarque-Bera test, tail-weight index. See why Sharpe alone misleads.

Sources

  1. Practical Portfolio Performance Measurement and Attribution , Carl R. Bacon, Wiley (2008)
  2. Managed Futures (CME Group education) , CME Group educational reference

Keep the topic connected

  • Formula 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.

  • Formula 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.

  • Formula 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.

  • Learn Drawdown

    Drawdown explained: peak-to-trough decline, why max drawdown alone is misleading, and the recovery math that actually matters.