Information Ratio – Comparing Performance

The chart below, Information Ratio for All Years of Data, is posted through 2013 shows the relative performance of all trading programs compared to the broad indexes.

The information ratio is the annualized return divided by the annualized risk, giving the positive payout in terms that most investors would choose. The higher the ratio, the more desirable.

Note that the ETFs for the three broad index markets, the SP (SPY), Nasdaq (QQQ), and the Russell 2000 (IWM) have the smallest ratios, indicating that over the long-term, the risk is high compared to the return. The highest ratio is shown for the Weekly Trend program of 30 stocks (well diversified). Using weekly data smooth out the price movement and allows you to stay with the trend, a great advantage during the past few years. Trading 30 stocks rather than a fewer number makes any odd movement in one stock only about 3% of the total return.

Comparison of ratios all systems

 

All of the portfolios had ratios much higher than the major index markets, showing that there are many sound strategies that limit risk and capture returns. That is not to say that they don’t have drawdowns, but the pattern of returns is far more stable than a buy-and-hold strategy in stocks, and ultimately more profitable.

 

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