Sharpe, beta, and maximum drawdown compared
| Metric | What It Measures | Good Target |
|---|---|---|
| Sharpe Ratio | Return per unit of risk | Above 1.0 (rough guide; needs a long sample + benchmark) |
| Beta | Correlated movement with the market (not total volatility) | 1.0 = same as market, <1 = less volatile |
| Max Drawdown | Worst peak-to-trough loss | Lower is better -- but the S&P 500 itself has had 15+ drops of 20%+ since 1926 (one roughly every 7-10 years), so a 20% drawdown is the price of the equity risk premium, not a failure. Lower drawdown means lower expected return -- adjust by adding bonds, not by stock-picking. |
| Correlation | How stocks move together | Lower correlation = better diversification |
A quick refresher on the Sharpe ratio
Refresher: the Sharpe ratio is (portfolio return minus the risk-free rate) divided by volatility -- return per unit of total risk, with above 1.0 a rough 'good' guide over a long enough sample. The full treatment, including the interactive calculator and the leverage-equivalence argument for why a higher Sharpe wins even at a lower absolute return, lives in the same path at Risk-Adjusted Returns: Measuring What Matters (risk-6). This module keeps Sharpe only as one entry in the metrics overview and focuses on Beta and Max Drawdown.
Check your own Sharpe, beta, and drawdown
Open the Portfolio Analytics tab and check your Sharpe Ratio, Beta, and Max Drawdown. Is the risk justified by the return?
Trading off Sharpe against drawdown
Portfolio A: Sharpe 1.2, max drawdown 15%. Portfolio B: Sharpe 0.9, max drawdown 8%. Which is the better portfolio?
Check your understanding
Sit with the ideas.
A portfolio has a beta of 0.6 to the S&P 500. In a quarter where the index falls 10%, what does beta alone predict for the portfolio?
Why: