Looking only at returns can be misleading. A portfolio might grow quickly, but if it swings wildly or suffers deep drawdowns, is it really a good investment? Risk-adjusted performance metrics help answer that question by letting investors evaluate performance based on the risks that matter most to them.
In this post, we’ll walk through the common risk-adjusted metrics, explain how they work, and later compare three portfolios plus SPY as a benchmark using these metrics.
Three Types of Risk-Adjusted Metrics
Risk-adjusted metrics normalize returns by different types of risk, allowing you to compare strategies more meaningfully. Here’s how they break down:
1. Volatility-Based Metrics
These treat risk as volatility — how much returns vary over time. Smooth, consistent strategies are rewarded; highly volatile ones are penalized.
- Sharpe Ratio: Return relative to total volatility
- Sortino Ratio: Return relative to downside volatility
- Omega Ratio: Probability-weighted gains vs. losses beyond a threshold
These are especially useful when comparing strategies with different return distributions. While Sharpe and Sortino rely on standard deviation, Omega can account for asymmetry or skew.
2. Drawdown-Based Metrics
These focus on the actual experience of loss — how deep and how long a portfolio stays underwater.
- Calmar Ratio: Return relative to max drawdown
- Recovery Factor: Return relative to recovery difficulty
- Ulcer Performance Index (UPI): Penalizes long and deep drawdowns
- Serenity Ratio: Combines volatility and drawdown for a more holistic view
These are most relevant for long-term investors focused on portfolio resilience and psychological comfort during downturns.
3. Benchmark-Relative Metrics
These compare a portfolio’s return to a benchmark, while adjusting for systematic risk or active risk.
- Alpha: Outperformance after adjusting for market risk
- Treynor Ratio: Return relative to market exposure (beta)
- Information Ratio: Return relative to tracking error (consistency of outperformance).
Here’s a quick reference table:
| Metric | What it Measures | When to Use | Good Value |
|---|---|---|---|
| Sharpe Ratio | Return per unit of total volatility | Comparing overall efficiency of different strategies | > 1.0 (good), > 2.0 (very good) |
| Sortino Ratio | Return per unit of downside volatility | When drawdowns matter more than upside swings | > 1.0 (good), > 2.0 (very good) |
| Omega Ratio | Gains vs. losses beyond a set threshold | For skewed or asymmetric return profiles | > 1.0 (good), > 1.5 (strong) |
| Calmar Ratio | Return relative to maximum drawdown | Assessing reward vs. deep losses | > 0.5 (acceptable), > 1.0 (strong) |
| Recovery Factor | Return relative to drawdown recovery effort | Measuring resilience over long drawdowns | > 1.0 (baseline), > 2.0 (resilient) |
| Ulcer Performance Index | Return adjusted for drawdown depth & duration | Prioritizing smooth and stress-free growth | > 0.5 (solid), > 1.0 (very strong) |
| Serenity Ratio | Return adjusted for both volatility and drawdowns | Holistic view on stable growth | > 0.5 (good), > 1.0 (very good) |
| Alpha | Excess return vs. benchmark (CAPM-adjusted) | Measuring skill or market-beating performance | > 0.0% (positive = outperformance) |
| Treynor Ratio | Return per unit of systematic (beta) risk | For well-diversified portfolios | > 0.5 (solid), varies with beta levels |
| Information Ratio | Excess return per unit of tracking error | Measuring consistency of active manager performance | > 0.5 (good), > 1.0 (excellent) |
Note: Full formulas and definitions you can find on our Metrics Overview Page.
Case: Comparing different Portfolios
To see risk-adjusted metrics in action, we ran a 20-year backtest from July 12, 2005 – July 12, 2025. Each portfolio started with an initial investment of $10,000, rebalanced annually. We used SPY as the benchmark.
| Portfolio | Asset Allocation |
|---|---|
| Three-Fund Portfolio | 33% VTI (US Total Market), 33% EFA (Developed International), 33% AGG (US Bonds) |
| Buffett’s 90/10 | 90% SPY (S&P 500), 10% SHY (Short-Term Treasuries) |
| QQQ | 100% QQQ (Nasdaq 100) |
| SPY (Benchmark) | 100% SPY (S&P 500) |
| Metric | Three-Fund Portfolio | 90/10 Portfolio | QQQ | Benchmark SPY |
|---|---|---|---|---|
| Sharpe Ratio | 0.58 | 0.63 | 0.76 | 0.62 |
| Sortino Ratio | 0.81 | 0.89 | 1.08 | 0.87 |
| Omega Ratio | 1.12 | 1.13 | 1.15 | 1.13 |
| Calmar Ratio | 0.17 | 0.20 | 0.28 | 0.19 |
| Recovery Factor | 3.68 | 4.33 | 6.19 | 4.31 |
| Ulcer Performance Index | 0.09 | 0.11 | 0.13 | 0.13 |
| Serenity Ratio | 0.55 | 0.67 | 1.00 | 0.65 |
| Alpha | 0.00 | 0.00 | 0.04 | – |
| Treynor Ratio | 433.8% | 626.1% | 1523.4% | – |
| Information Ratio | -3.4% | -2.9% | 3.4% | – |
Three-Fund Portfolio
Strengths:
Shows solid defensiveness.
Sharpe (0.58), Omega (1.12), and Ulcer Performance Index (0.09) are all within acceptable to good ranges.
The global diversification and low maintenance make it a robust long-term option.
Weaknesses:
Recovery Factor (3.68) is strong in absolute terms, but lower than the other portfolios.
Calmar Ratio (0.17) indicates a relatively poor return-to-drawdown profile.
Serenity Ratio (0.55) is the lowest among the group, though still within the acceptable range.
Benchmark-relative:
Alpha is neutral, and Information Ratio (–3.4%) shows weak consistency vs. the benchmark.
Treynor Ratio (433.8%) is okay, but significantly behind more aggressive strategies.
Verdict:
This portfolio focuses on stability and behavioral robustness over alpha generation. It’s a strong fit for long-term, risk-conscious investors who prefer global balance and minimal intervention.
90/10 Portfolio
Strengths:
Improves across most metrics compared to Three-Fund.
Sharpe (0.63), Sortino (0.89), and Omega (1.13) are all within good territory.
Recovery Factor (4.33) and UPI (0.11) show stronger drawdown recovery and smoother growth.
Weaknesses:
Still generates no Alpha, and Serenity Ratio (0.67) remains in the moderate range.
Benchmark-relative:
Treynor Ratio (626.1%) is strong, indicating good reward per unit of beta risk.
Information Ratio is still negative (–2.9%), suggesting inconsistent outperformance.
Verdict:
A pragmatic balance between defense and growth.
Appeals to investors seeking higher returns than Three-Fund, but without taking on full QQQ-level risk.
QQQ
Strengths:
Top-tier across nearly all metrics.
Sharpe (0.76), Sortino (1.08), Omega (1.15), and Serenity Ratio (1.00) all meet or exceed very good thresholds.
Excellent drawdown handling: Recovery Factor (6.19), Calmar (0.28), UPI (0.13).
Weaknesses:
Highly concentrated in tech.
Past performance may not repeat.
Higher volatility and beta demand strong risk tolerance.
Benchmark-relative:
The only portfolio with positive Alpha (0.04).
Leads in Treynor Ratio (1523.4%) and Information Ratio (3.4%), indicating sustained, efficient outperformance.
Verdict:
QQQ was the standout performer in this period, but also the most aggressive. Best for investors with long horizons, high conviction, and the ability to tolerate volatility.
SPY
Strengths:
Steady across key metrics:
Sharpe (0.62), Sortino (0.87), Omega (1.13), and Recovery Factor (4.31) are all solid.
Serenity Ratio (0.65) reflects moderate but stable performance.
Weaknesses:
Doesn’t lead in any metric.
Risk-adjusted returns slightly lag QQQ and 90/10.
Benchmark-relative:
Acts as the benchmark itself, so Alpha, Treynor, and Information Ratio are not relevant.
Verdict:
A dependable core holding for broad market exposure.
Lacks the upside of growth-heavy strategies but offers simplicity and consistency, making it a go-to option for many investors.
Final Thoughts
The performance metrics we used are not arbitrary, they are among the most robust tools available to evaluate investment strategies. They quantify how well a portfolio balances risk and return, how efficiently it recovers from losses, and how consistently it adds value over a benchmark. Still, they don't tell the whole story.
QQQ leads across most indicators, but its recent success is tied to a historic bull market in tech, a sector prone to concentration risk and cyclicality. That makes it unsuitable for some investor profiles, like retirees with short horizons or low risk tolerance.
No single number can fully reflect what matters most: your goals, your time horizon, and your ability to stay the course during volatility. Metrics are a powerful compass, but the right portfolio always depends on the person holding it.