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Pain Ratio Formula:
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The Pain Ratio provides a better assessment for understanding the amount of return per unit of risk, measured in terms of capital preservation. It helps investors evaluate the efficiency of their investments in relation to the discomfort or risk experienced.
The calculator uses the Pain Ratio formula:
Where:
Explanation: The equation calculates the return per unit of risk, helping investors understand how much return they're getting for each unit of discomfort or risk endured.
Details: The Pain Ratio is crucial for evaluating investment efficiency and risk-adjusted returns. It helps investors make more informed decisions by quantifying the relationship between returns and the psychological discomfort or risk associated with an investment.
Tips: Enter Effective Return and Pain Index as percentage values. Both values must be valid (Effective Return ≥ 0, Pain Index > 0).
Q1: What is considered a good Pain Ratio?
A: A higher Pain Ratio indicates better risk-adjusted returns. Generally, a ratio above 1.0 is considered good, but this can vary by investment strategy and market conditions.
Q2: How is Effective Return different from simple return?
A: Effective Return accounts for compounding effects over time, providing a more accurate measure of actual returns compared to simple return calculations.
Q3: What does the Pain Index measure?
A: The Pain Index quantifies investment risk in terms that investors can relate to - how much money they might lose or the psychological discomfort experienced during market downturns.
Q4: Can Pain Ratio be negative?
A: Yes, if Effective Return is negative while Pain Index is positive, the Pain Ratio will be negative, indicating poor risk-adjusted performance.
Q5: How often should I calculate Pain Ratio?
A: Regular monitoring (quarterly or annually) helps track investment performance and risk management effectiveness over time.