Rachev Ratio

The Rachev Ratio is a risk-adjusted performance measure used to compare the potential for gains against the potential for losses in an investment or portfolio. It is calculated by dividing the tail gain expectation by the tail loss expectation at specific confidence levels. The Rachev Ratio is particularly useful for evaluating investments with skewed return distributions, as it provides insight into how much downside risk an investor takes on for potential upside gains. A higher Rachev Ratio indicates better risk-adjusted performance.

Example

An investment with a Rachev Ratio of 2.5 means that for every unit of potential downside, there is 2.5 times the potential upside, showing a favorable risk-reward balance.