Direct Answer
The Burke ratio divides a portfolio's excess return by the square root of the sum of its squared drawdowns, so repeated or deep drawdowns are penalized more than a single one. It is a drawdown-based alternative to the Sharpe ratio. Higher is better: more excess return per unit of drawdown pain.
Burke Ratio: Formula, Meaning, Signals, Examples and How to Use It
How Is Burke Ratio Calculated?
The Burke ratio divides a portfolio's excess return by the square root of the sum of its squared drawdowns, so repeated or deep drawdowns are penalized more than a single one. It is a drawdown-based alternative to the Sharpe ratio.
Formula: Burke ratio = (annualized return - risk-free rate) / sqrt(sum of D_i^2), D_i = the i-th drawdown depth
Inputs:
- Annualized portfolio return
- Risk-free rate
- Depths of the individual drawdowns over the period
- Rule for which drawdowns count (for example, the largest N)
Worked example. An annualized return of 12%, a 2% risk-free rate and drawdowns of 10%, 5% and 3% give a Burke ratio of 0.86. The inputs are illustrative numbers, not market data.
Reading it. Higher is better: more excess return per unit of drawdown pain. Values are only comparable across series measured over the same horizon with the same drawdown selection rule.
Limits. Versions differ: some divide the sum of squared drawdowns by the number of drawdowns before the square root, which changes the scale. The result also depends on how many drawdowns are included and on the sampling frequency.
What is Burke Ratio?
The Burke ratio divides a portfolio's excess return by the square root of the sum of its squared drawdowns, so repeated or deep drawdowns are penalized more than a single one. It is a drawdown-based alternative to the Sharpe ratio.
How to use Burke Ratio
Higher is better: more excess return per unit of drawdown pain. Values are only comparable across series measured over the same horizon with the same drawdown selection rule. A reading alone is never a buy or sell signal; it needs context from price structure, volume, volatility and the broader market regime.
Strengths
- Squaring each drawdown depth before summing penalizes one deep decline more than several shallow ones of the same total depth.
- Using every drawdown, not only the maximum, means the figure reflects how often and how deeply the path fell.
- Reproducible when the formula and data convention are fixed.
Weaknesses and limitations
- Because depth is measured from running peaks, a long shallow decline counts as one drawdown despite lasting years, so time underwater is under-represented.
- With few drawdowns in a short history, the square root of their sum swings with each new one, so the denominator has no stable scale.
- Correlated indicators can create false confidence by repeating the same underlying information.
Editorial and risk note
This page is educational content, not individualized investment advice. It should not imply guaranteed prediction, accuracy or outperformance.
Frequently Asked Questions
Is Burke Ratio a buy or sell signal?
No. Higher is better: more excess return per unit of drawdown pain. Versions differ: some divide the sum of squared drawdowns by the number of drawdowns before the square root, which changes the scale. A trade built on it still needs a trigger, an invalidation rule, a position size and realistic execution assumptions.
What is the best setting for Burke Ratio?
Burke Ratio takes these inputs: annualized portfolio return; risk-free rate; depths of the individual drawdowns over the period. There is no universal best setting for the tunable ones, so test them across instruments, regimes and out-of-sample periods and favor stable parameter regions over one historical winner.
Can Burke Ratio be used by itself?
Versions differ: some divide the sum of squared drawdowns by the number of drawdowns before the square root, which changes the scale. The result also depends on how many drawdowns are included and on the sampling frequency. For that reason it is read next to measures of direction, participation, valuation, liquidity and risk, not alone.
Does Burke Ratio work on every timeframe?
The calculation (Burke ratio = (annualized return - risk-free rate) / sqrt(sum of D_i^2), D_i = the i-th drawdown depth) can be run on any bar size, but behavior is not portable: a reading on a five-minute chart describes a very different market window from the same reading on a daily chart. Validate the exact timeframe before relying on it.
Why does Burke Ratio give false signals?
Because depth is measured from running peaks, a long shallow decline counts as one drawdown despite lasting years, so time underwater is under-represented. With few drawdowns in a short history, the square root of their sum swings with each new one, so the denominator has no stable scale. Lag, noise and regime changes add to this, because market participants react to new information after the reading is calculated.
How should Burke Ratio be backtested?
Rebuild Burke Ratio from annualized portfolio return using point-in-time data, write the rules before testing, include delisted securities where relevant, model realistic fills and costs, reserve a validation sample and compare with a simpler baseline.