what the k ratio can tell you
the k ratio was developed by derivatives trader and statistician lars kestner as a way to address a perceived gap in how returns had been analyzed because an investor s key interests are returns and consistency kestner designed his k ratio to measure risk versus return by analyzing how steady a security portfolio or manager s returns are over time the k ratio takes into account the returns but also the order of those returns in measuring risk the calculation involves running a linear regression on the logarithmic cumulative return of a value added monthly index vami curve the results of the regression are then used in the k ratio formula the slope is the return which should be positive while the standard error of the slope represents the risk in 2003 kestner introduced a modified version of his original k ratio which changed the formula of the calculation to include the number of return data points in the denominator he introduced a further modification which added a square root calculation to the numerator in 2013 1example of how to use the k ratiothe ratio measures the return of the security over time and it is considered to be a good tool to measure the performance of equities because it takes the return trend into account versus point in time snapshots the k ratio allows for a comparison of cumulative returns for different equities and equity managers returns over time it differs from the widely used sharpe measure by taking into account the order in which returns occur in practice the k ratio is designed to be viewed in tandem with and in addition to other measures of performance in addition to their use in analyzing individual stock returns style categories and fund managers k ratios can also be calculated for bonds k ratios will differ across asset classes domestic stocks versus bonds versus emerging market stocks within asset classes e g large cap versus small cap and by time period 