Sharpe ratio, max drawdown and CAGR: how to read a portfolio
A return on its own says almost nothing: two portfolios can earn the same and put whoever held them through very different rides. These are the measures used to see it — compound annual growth, volatility, maximum drawdown and the Sharpe, Sortino and Calmar ratios —, what each one measures and where it misleads, with the numbers of a simulated S&P 500 portfolio and its index.
01Compound annual growth rate (CAGR)
CAGR is the fixed yearly percentage that would take the starting point to the end point: (final value / initial value)^(1 / years) − 1. It is the figure that sums up a portfolio in one line. The 20-stock multi-factor portfolio multiplied its value by 19.6 in 27.64 years (+1,862%), which is 11.37% a year; the equal-weight index, +1,428%, 10.37% a year.
It is not the average of each year's returns, and the difference matters. If something rises 50% and then falls 50%, the average is zero, but 100 has become 75. With the 331 months of the multi-factor 20 published curve, the annualized monthly average comes out at 13.1%, almost two points above its CAGR. In the 20-stock value portfolio, which is far jumpier, the average is 16.0% and the CAGR 11.36%. The more a portfolio moves, the further apart the two figures drift, and the one that reaches your pocket is CAGR.
The site computes CAGR over real calendar years, not over a theoretical number of periods, because that shortcut always favors the portfolio (methodology, section 6).
02Volatility
It is the standard deviation of the portfolio's changes, scaled to a year: how much it moves around its average. The multi-factor 20 has 25.35%; the equal-weight index, 20.27%. The portfolio earns more, but moves quite a bit more to get there.
It depends on how it is measured. With the curve's monthly points, the same portfolio's volatility comes out at 21.21%, four points lower, because what rises and falls within the month is invisible. This site publishes the figure computed day by day, which is the highest. If you compare two portfolios, check that both were measured at the same frequency.
03Maximum drawdown
The worst fall from a peak to the following trough. It is what someone who bought at the worst moment would have seen lost.
The multi-factor 20's is −63.55%, measured day by day; the equal-weight index's, −60.41%. With monthly points, the portfolio's runs from December 7, 2007 to March 11, 2009 (−61.14%) and it does not regain its previous peak until July 12, 2013: five and a half years. The index, which fell somewhat less, regained it on January 7, 2011.
What makes a drawdown hard is the arithmetic of the way back:
| If it falls… | …it needs to rise |
|---|---|
| −10% | +11.1% |
| −20% | +25.0% |
| −50% | +100.0% |
| −63.55% (multi-factor 20) | +174.3% |
| −80% | +400.0% |
And there is a sister measure almost nobody publishes: how long you spend below the peak. With monthly points, the multi-factor 20 was below its previous peak in 72.6% of months; the index, in 62.7%. A portfolio that earns more in the long run can spend more time in the red from its best moment.
04The Sharpe ratio
It combines the two previous ideas in one number: (return − risk-free rate) / volatility. How much you were paid per unit of turbulence. The risk-free rate this site uses is each day's 3-month US Treasury bill, which over this window ranged from 0.02% to 5% depending on the year.
| 1998-2026, 20 stocks in equal parts | Annual | Volatility | Sharpe |
|---|---|---|---|
| Multi-factor | 11.37% | 25.35% | 0.47 |
| Value | 11.36% | 28.89% | 0.45 |
| Quality | 10.39% | 21.81% | 0.47 |
| Momentum | 9.93% | 25.11% | 0.42 |
| Growth | 7.93% | 26.72% | 0.34 |
| Equal-weight S&P 500 (calculated) | 10.37% | 20.27% | 0.49 |
Read the table like this: quality returns about the same as the index with similar volatility, and ends up with a similar Sharpe; value returns one point more, but with much more volatility, and its Sharpe ends up below. None of the five beats the index on this measure.
Where the Sharpe ratio misleads
It depends on the window. Over the last four years of the simulation (8/15/2022 – 8/21/2026), the same multi-factor 20 has a Sharpe of 1.13. Same rule; what changes is the slice of history.
It depends on the frequency. Computed with monthly points, the multi-factor's comes out at 0.52 instead of 0.47.
It treats rising and falling alike. A portfolio that jumps upward is punished like one that jumps downward. That is what Sortino is for.
05Sortino and Calmar
The Sortino ratio is a Sharpe that only counts falls as risk. The multi-factor 20's is 0.67.
The Calmar ratio divides the annual return by the maximum drawdown: how much was earned per year for every point of the worst scare. The multi-factor 20 has 0.18 (11.37 / 63.55). With the equal-weight index's two published figures it comes out at 0.17 (10.37 / 60.41). Among the 20-stock portfolios, the highest is quality's (0.19) and the lowest growth's (0.11); value has 0.14 and momentum 0.15. It is the measure closest to the question an investor asks in a crisis: does what I earn make up for what I could lose?
06Beta, alpha and positive months
Beta measures how much the portfolio moves when the index moves. The multi-factor 20's against the equal-weight index is 0.78: it dampens. Alpha is what it earned per year beyond what that beta would explain: +2.80%. The counter-example is the 20-stock value portfolio: it returns almost the same as the multi-factor, but with a beta of 1.50, and its alpha comes out at −3.14%. Out-earning the index by taking more market risk is not beating it; it is explained in the value investing guide.
The share of positive months is the easiest measure to misread. The multi-factor 20 rose in 209 of 331 months (63.14%)… and the equal-weight index also rose in 209. What sets the portfolio apart is a different number: it beat the index in 187 of those 331 months (56%). And the site's methodology puts that edge through a test: at 90% confidence, the annual difference lies between −4.2 and +6.3 points. Zero is inside, so the edge is not proven.
07Frequently asked questions
What is a good Sharpe ratio?
There is no universal threshold. People often say above 1 is good, but over 27.6 years neither the equal-weight S&P 500 (0.49) nor any of this site's 20-stock portfolios (between 0.34 and 0.47) reach 1. A Sharpe ratio can only be compared with another measured over the same window, the same market and the same data frequency.
What is the difference between the Sharpe and Sortino ratios?
Both divide the return above the risk-free rate by a measure of risk. Sharpe uses all of the volatility, upward and downward; Sortino only the downward part, so it does not punish a portfolio for jumping up.
What is maximum drawdown?
The largest loss from a peak to the following trough, before that peak is regained. It is what someone who invested at the worst moment would have seen lost. A 50% drawdown needs a 100% gain to get back to the start.
Why is the daily maximum drawdown larger than the monthly one?
Because with one data point a month, the lows between two dates are invisible. In the 20-stock multi-factor portfolio, the drawdown measured day by day is 63.55% and with monthly points 61.14%. This site publishes the daily one, which is the harsher.
How do I calculate these metrics for my own portfolio?
My Portfolio calculates the annual return, volatility, maximum drawdown, Sharpe, Sortino, Calmar, beta and alpha of the stocks you enter, without telling you what to do with them.
08What these numbers do not say
- They are simulated. Nobody traded these portfolios in 1998. It is a rule applied forward, month by month, with the data that existed at each date. The equal-weight index is also a calculation, not a fund.
- They carry no costs. No commissions, no spread, no taxes, no currency conversion, and all are in dollars. Costs lower the CAGR, Sharpe and Calmar of a portfolio that turns over every month.
- They look backward. All these measures describe what already happened. A 63% maximum drawdown is not a floor: the next one can be deeper.
- One window, one market. 27.6 years of the 500 largest US companies. Another start date would give other figures, as the last four years' Sharpe shows.
All the measures of the twenty portfolios, with their curves, are in Model Portfolios (this example's is on the multi-factor 20 page). How each one is computed, in the methodology. To see how they change when you touch the number of stocks or the weighting, the simulator. And today's order of the ~500 companies, in the rankings.
More guides: what value investing is, what momentum is, three ways to invest in the S&P 500 and what insider buying is.
This is not investment advice. This guide explains how some measures are read; it does not say what to do with your money and does not account for your personal situation. All results for the portfolios and the equal-weight index are simulated, before commissions, spreads and taxes. Past performance, and simulated performance even less, does not guarantee future returns, and investing in stocks can mean losing part or all of your capital. The author discloses his interests in the conflict-of-interest statement.
Published September 19, 2026. Figures from carteras.json (window up to 8/21/2026) and from the methodology of that day. The annualized monthly average, the dates and length of the worst drawdown, the time below the peak and the index's positive months are calculated on the 331 monthly points of the published curve, downloadable as CSV; the index's Calmar, from its two published figures.