--- title: "Martin Ratio: Formula, Meaning & Signals" description: "The Martin ratio divides a portfolio's excess return by the Ulcer Index, which measures the depth and duration of drawdowns. It is the same calculation as..." canonical: https://www.getswoopr.com/indicators/portfolio-and-risk/martin-ratio/ source: "Swoopr Investment: https://www.getswoopr.com" --- ## Direct Answer > The Martin ratio divides a portfolio's excess return by the Ulcer Index, which measures the depth and duration of drawdowns. It is the same calculation as the Ulcer Performance Index, named after Peter Martin. Higher means more excess return per unit of drawdown stress. # Martin Ratio: Formula, Meaning, Signals, Examples and How to Use It ## How Is Martin Ratio Calculated? The Martin ratio divides a portfolio's excess return by the Ulcer Index, which measures the depth and duration of drawdowns. It is the same calculation as the Ulcer Performance Index, named after Peter Martin. **Formula:** `Martin ratio = (annualized return - risk-free rate) / Ulcer Index` **Inputs:** - Annualized return - Risk-free rate - Ulcer Index over the same period (root mean square of percentage drawdowns from the running peak) **Worked example.** An annualized return of 9%, a 2% risk-free rate and an Ulcer Index of 0.05 give a Martin ratio of 1.40. The inputs are illustrative numbers, not market data. **Reading it.** Higher means more excess return per unit of drawdown stress. Because the Ulcer Index penalizes prolonged time under water, a strategy with long recoveries scores worse than one with brief dips of the same depth. **Limits.** The Ulcer Index must be expressed in the same units (decimal or percent) as the return or the ratio is off by 100. The ratio is path-dependent and unstable over short samples. ## What is Martin Ratio? The Martin ratio divides a portfolio's excess return by the Ulcer Index, which measures the depth and duration of drawdowns. It is the same calculation as the Ulcer Performance Index, named after Peter Martin. ## How to use Martin Ratio Higher means more excess return per unit of drawdown stress. Because the Ulcer Index penalizes prolonged time under water, a strategy with long recoveries scores worse than one with brief dips of the same depth. A reading alone is never a buy or sell signal; it needs context from price structure, volume, volatility and the broader market regime. ## Strengths - The Ulcer Index in the denominator counts both depth and the number of periods spent below peak, so time underwater affects the ratio. - It is excess return divided by one downside measure, so two portfolios can be ranked by return per unit of drawdown pain. - Reproducible when the formula and data convention are fixed. ## Weaknesses and limitations - Because the denominator is a root mean square, one long deep drawdown dominates, and a portfolio is judged mostly on its worst episode. - The index is zero for a portfolio that never falls below a peak, and the ratio is then undefined. - 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 Martin Ratio a buy or sell signal? No. Higher means more excess return per unit of drawdown stress. The Ulcer Index must be expressed in the same units (decimal or percent) as the return or the ratio is off by 100. 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 Martin Ratio? Martin Ratio takes these inputs: annualized return; risk-free rate; ulcer Index over the same period (root mean square of percentage drawdowns from the running peak). 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 Martin Ratio be used by itself? The Ulcer Index must be expressed in the same units (decimal or percent) as the return or the ratio is off by 100. The ratio is path-dependent and unstable over short samples. For that reason it is read next to measures of direction, participation, valuation, liquidity and risk, not alone. Does Martin Ratio work on every timeframe? The calculation (Martin ratio = (annualized return - risk-free rate) / Ulcer Index) 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 Martin Ratio give false signals? Because the denominator is a root mean square, one long deep drawdown dominates, and a portfolio is judged mostly on its worst episode. The index is zero for a portfolio that never falls below a peak, and the ratio is then undefined. Lag, noise and regime changes add to this, because market participants react to new information after the reading is calculated. How should Martin Ratio be backtested? Rebuild Martin Ratio from annualized 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. ## References - [Peter Martin: Ulcer Index and UPI Measure Investment Risk and Risk-Adjusted Performance](https://www.tangotools.com/ui/ui.htm) S Swoopr Editorial Team The Swoopr Editorial Team produces independent investment education, research, and tools for understanding markets, evaluating opportunities, and managing risk. All content is educational only and does not constitute personalized investment advice. See our [editorial policy](https://www.getswoopr.com/legal/editorial-policy/) and [corrections policy](https://www.getswoopr.com/legal/corrections-policy/).