Measuring risk-adjusted performance

8 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

The Sharpe ratio is excess return (over cash) divided by volatility. A higher Sharpe means more return per unit of risk. The Sortino ratio uses only downside volatility, so it does not penalise upside swings. The Calmar ratio divides return by maximum drawdown.

Maximum drawdown is the largest peak-to-trough fall. It matters because losses compound unevenly: a 50% fall needs a 100% gain to recover.

Value at Risk (VaR) estimates the loss not exceeded with a given confidence, for example "95% one-month VaR of $10,000". It says nothing about how bad the worst 5% can be; Conditional VaR (expected shortfall) fills that gap. Vestora's portfolio risk panel shows several of these.

Formula

Sharpe = (Rp - Rf) / σp
Sortino = (Rp - Rf) / σdownside
Recovery gain = 1 / (1 - loss) - 1

Key takeaways

Sharpe = (Return - Rf) / Volatility.
A 50% loss needs a 100% gain to recover.
VaR ignores tail size; expected shortfall measures it.

Check your understanding

1. Return 10%, cash 4%, volatility 15%. Sharpe ratio?

0.27
0.40
0.67
2.5

Show the answer

0.40. (10 - 4) / 15 = 0.40.

2. After a 40% fall, what gain is needed to get back to even?

40%
50%
66.7%
100%

Show the answer

66.7%. 1 / 0.6 - 1 = 66.7%.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.