What is the Rachev ratio?

This is a risk-return performance measure used for investment assets, portfolios or strategies. It’s named after its creator, the Bulgarian mathematician Svetlozar Rachev.

Where have you heard of the Rachev ratio?

It was first introduced in 2004. It’s one of many ways you can measure the risk of a portfolio – but unlike others such as the Sharpe ratio, it’s a reward-to-risk ratio instead of a reward-to-variability ratio.

What you need to know about the Rachev ratio.

Its creator Svetlozar Rachev works in the field of mathematical finance, probability and statistics and is best known for his work in derivative pricing and financial risk modelling. Since its inception, the Rachev ratio has been widely studied and used in the field of quantitative finance. It’s designed to measure the right tail reward potential relative to the left tail risk in a non-Gaussian setting, and shows the potential for extreme positive returns compared to the risk of extreme losses.

Find out more about the Rachev ratio.

To learn more about assessing the risk of a portfolio, see our guide to modern portfolio theory.