K-ratio can be defined as a ratio that analyzes the consistency of a security’s return over the period time.
The information for the ratio comes from a value added monthly index (VAMI), that checks and reports the progress of a $1,000 original investment in the stock being examined.
K-ratio is determined as:
K-ratio analyzes the consistency of a security’s return over the period time.
K - Ratio = Slope of Log VAMI Regression Line* Square Root of the Number of Observations Per Year
(Standard Error of Slope * Number of Observations)
The K-ratio was created by derivatives trader and analyst Lars Kestner as an approach to address an apparent hole in how returns had been analyzed.
Since investor alarm about both returns as well as consistency, Kestner created his K-ratio to calculate risk versus return by examining how stable a equity, portfolio or manager’s returns are over the period of time.
It considers not just the profits themselves, but the order of those profits in measuring risk.
The estimation includes running a linear regression on the logarithmic cumulative return of a Value Added Monthly Index (VAMI) curve.
The outcomes of the regression are then utilized in the K-ratio formula.
The slope is the return, which ought to be be positive, while the standard error of the slope reflects the risk.