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Sterling Ratio

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Definition of 'Sterling Ratio'

The Sterling Ratio (SR) is a measure of the risk-adjusted return of an investment portfolio.

The original definition of the sterling ratio was probably suggested by Deane Sterling Jones (a company no longer in existence). Multiple definitions of the Sterling ratio exist. This one is the most common:

SR = APR / (ALD + 10%)

where
SR = Sterling Ratio
APR = Annual Portfolio Return
ALD = Average Largest Drawdown

The time period is usually over 3 years and only the largest individual drawdowns are included; for example 3 or 5.

The "plus 10%" definition is arbitrarily designed to provide a similar value to the Calmar Ratio. This version of the Sterling Ratio may be adjusted to something more like a Sharpe Ratio using the following formula:

SR = (APR - ARFR) / ALD

where
SR = Sterling Ratio
APR = Annual Portfolio Return
ARFR = Annual Risk Free Rate
ALD = Average Largest Drawdown

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