K-Ratio

What Is the K-Ratio?

The K-ratio is a valuation metric that looks at the consistency of an equity's return over the long run. The data for the ratio is derived from a value-added month to month index (VAMI), which utilizes linear regression to track the progress of a $1,000 initial investment in the security being examined.

Formula and Calculation of the K-Ratio

The K-ratio can be calculated as:

• where there are n return periods in the month to month return data.

Everything that the K-Ratio Can Say to You

The K-ratio was developed by derivatives trader and analyst Lars Kestner as a method for addressing a perceived gap in how returns had been examined. Since a financial backer's key interests are returns and consistency, Kestner planned his K-ratio to measure risk versus return by breaking down how consistent a security, portfolio, or director's returns are over the long haul.

The K-ratio takes into account the returns, yet additionally the order of those returns in measuring risk. The calculation includes running a linear regression on the logarithmic cumulative return of a Value-Added Monthly Index (VAMI) curve. The aftereffects of the regression are then utilized in the K-ratio formula. The slant is the return, which ought to be positive, while the standard blunder of the incline implies the liability.

In 2003, Kestner presented a modified variant of his original K-ratio, which changed the formula of the calculation to incorporate the number of return data points in the denominator. He presented a further modification, which added a square root calculation to the numerator, in 2013.

Illustration of How to Use the K-Ratio

The ratio measures the return of the security over the long haul and it is viewed as a decent device to measure the performance of equities since it takes the return trend into account, versus moment depictions.

The K-ratio takes into consideration a comparison of cumulative returns for various equities (and equity managers) returns over the long haul. It varies from the widely utilized Sharpe measure by taking into account the order in which returns happen. In practice, the K-ratio is intended to be seen in tandem with and notwithstanding different measures of performance.

Notwithstanding their utilization in dissecting individual stock returns, style categories, and fund managers, K-ratios can likewise be calculated for bonds. K-ratios will contrast across asset classes (domestic stocks versus bonds versus emerging market stocks), inside asset classes (e.g., enormous cap versus small-cap) and by time span.

Features

• The ratio measures the return of the security after some time and is a decent device to measure the performance of equities since it takes the return trend into account.
• The K-ratio takes into account the actual returns, yet in addition the order of those returns in measuring risk.
• The calculation includes running a linear regression on the logarithmic cumulative return of a Value-Added Monthly Index (VAMI) curve.
• K-ratios measure an equity's consistency of returns over the long haul, calculated utilizing the value-added month to month index (VAMI).