How each number is computed
The exact definition of total return, CAGR, volatility, Sharpe, max drawdown, hit rate and turnover as our engine calculates them.
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All figures come from one daily series: the value of the portfolio at each session's close, starting at 100. Prices are daily closes adjusted for splits and dividends, so returns are total returns.
Total return
total return = final value / starting value − 1
CAGR
Compound annual growth rate: the steady yearly return that would turn the starting value into the final value over the same time.
CAGR = (final value / starting value) ^ (1 / years) − 1
- 100 grows to 250 over 8 years.
- 250 / 100 = 2.5
- 2.5 ^ (1/8) = 1.1214
- CAGR = 12.14% a year
We show no CAGR for a record shorter than one year. Annualising three good months produces a number that means nothing. Try it yourself with the CAGR calculator.
Volatility
How much the daily returns vary, scaled to a year.
volatility = standard deviation of daily returns × √252
Sharpe ratio
Return earned per unit of volatility.
Sharpe = (mean daily return / standard deviation of daily returns) × √252
- Because we use a 0% risk-free rate, our Sharpe is a little higher than one computed against Treasury bills. Compare ours with ours, not with a figure from elsewhere.
- Sharpe treats upside and downside swings the same. A strategy that jumps up a lot is penalised for it.
- Above 1 over a long period is good for a stock strategy. A figure above 2 on a long backtest is more often a sign of a flaw than of skill.
Max drawdown
The largest fall from a previous high to a later low, over the whole record.
drawdown on a day = value that day / highest value so far − 1
- Value climbs to 180, falls to 117, later reaches 260.
- 117 / 180 − 1 = −35%
- Max drawdown: −35%, even though the record ends at a new high.
A drawdown needs a larger gain to recover than the fall that caused it. See the drawdown recovery calculator.
The year table and hit rate
- Each row is the strategy and the comparison over one calendar year.
- Hit rate is the number of years the strategy beat the comparison, counting complete years only when there are any.
- Best year and worst year are taken from the same table. A partial first or last year is marked as incomplete.
Turnover, costs and cash
- Turnover at a rebalance is the share of the portfolio that changed. Annual turnover is that summed over a year.
- Cost drag is the total paid in trading costs as a share of the portfolio. See Costs in a backtest.
- Cash is the average and the largest share of the portfolio left uninvested because too few stocks passed the rules.
Read next
- CAGR calculatorTurn a starting value, an ending value and a period into a yearly growth rate, and see what a rate does to a starting amount.
- Drawdown recovery calculatorA fall needs a larger gain to undo it. Enter a drawdown to see the gain required, and how long that takes at a steady return.
- Costs in a backtestEvery trade in our backtests pays a cost, on by default. What is charged, what is not, and why turnover decides how much it matters.
Something here wrong or unclear? Tell us. Informational only, not investment advice.