What is the V2 ratio?

The V2 ratio measures the risk-adjusted return of an asset or portfolio against a given benchmark, such as a stock market index. It tries to improve on existing measures of risk by taking into account the psychological impact of investment performance.

Where have you heard about the V2 ratio?

It's one of a number of ratios that have been developed to try to quantify investment risk. First published in 2011, it was created by Emmanuel Marot of quantitative trading company Zenvestment.

What you need to know about the V2 ratio.

When evaluating an investment performance, it’s normal to compare returns to an index such as the FTSE 100. The V2 ratio divides the excess return by the quadratic mean of the relative drawdown. This compares the loss in value of the investment since its previous peak with the benchmark's loss in value.

Relative performance is psychologically more relevant than absolute performance. For example, if an asset is down 20% since its peak while the market at large is down by 15%, the relative drawdown is actually only 5% but seems worse because of the overall loss of the market.

Find out more about the V2 ratio.

Read our definition of Sharpe ratio, which is similar to the V2.