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.
Portfolio A has Sharpe 1.5 and Portfolio B has Sharpe 0.5. Which gives better risk-adjusted returns?
Why: