Risk & Efficiency Metrics (Risk-Adjusted Metrics)

Evaluating a portfolio based solely on absolute return is insufficient: high returns may stem from taking excessive risk. Firewire Analytics calculates a suite of institutional risk metrics to measure capital management quality.

Section: Methodology · Risk Management · Updated August 10, 2026

1. Sharpe Ratio

The Sharpe ratio measures the excess return of a portfolio over the risk-free rate per unit of total risk (standard deviation of returns):

$$\text{Sharpe} = \frac{R_p - R_f}{\sigma_p} \cdot \sqrt{N}$$

where:

$R_p$ — average portfolio return;
$R_f$ — risk-free rate;
$\sigma_p$ — standard deviation (volatility) of portfolio returns;
$N$ — annualization factor (252 for trading days).

Interpretation:

Sharpe < 0.5 — Weak risk-adjusted performance;
0.5 – 1.0 — Good balanced portfolio performance;
Sharpe > 1.0 — Excellent risk management;
Sharpe > 2.0 — Outstanding institutional grade.

2. Sortino Ratio

Unlike the Sharpe ratio, the Sortino ratio penalizes only downside volatility, avoiding penalizing positive upside surges:

$$\text{Sortino} = \frac{R_p - R_f}{\sigma_{\text{down}}}$$

3. Alpha ($\alpha$) and Beta ($\beta$)

Compare portfolio movements against the benchmark index (MCFTR / IMOEX):

Beta ($\beta$) — Market sensitivity factor.
Alpha ($\alpha$) — Excess return generated by manager skill beyond benchmark movements.

4. Value at Risk (VaR 95%)

VaR (95%) estimates the maximum expected daily portfolio loss with 95% confidence under normal market conditions:

$$\text{VaR}_{95\%} = \text{Portfolio Value} \times 1.645 \times \sigma_{\text{daily}}$$

5. Max Drawdown

Measures the maximum percentage drop from peak portfolio valuation to local trough over the selected horizon.

$$\text{Max Drawdown} = \frac{\text{Peak Value} - \text{Trough Value}}{\text{Peak Value}} \times 100\%$$

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