Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. 24 Table 3. Calculations for Measuring Performance Calculation Advantages Disadvantages Cumulative EBIT Average VaR (Average is a straight arithmetic average) • Used to track the performance of the trading business based on the risks taken • Not useful for evaluating assets because of operational complexities and constraints Cumulative EBIT Average Risk Capital Please see Section IV for more detail. • Used to track the performance of the trading business based on the risks taken • Not useful for evaluating assets because of operational complexities and constraints • The denominator must be a relevant number for the reporting period (e.g., an average capital level for the period) as the component capital estimates will change depending on the changes in the underlying portfolio and activity levels Annualized EBIT Annualized VaR (Where annualized VaR = VaR * √Time) • Accurate for constant portfolios • Represents trading well • Annualized measure • Good trending information • Does not work if portfolio is growing • Must be used annually • Not good for comparative purposes Average Daily EBIT Average Daily VaR (Average daily VaR could be the average of each day’s VaR over the period, half the sum of the VaR at the beginning of the period and the ending VaR, the median VaR, or some other measure.) • Good measure for average daily returns • Excellent trending information • Becomes too smooth and less transparent relative to extremes • Trading measure only Sharpe Ratio= (Realized Return – Risk Free Return) / Annualized Std Deviation of Returns • Ratio format for comparative purposes • Works well for constant-size portfolios • Works for trading and marketing operations • Misleading if the portfolio changes in size • Risk-free return rates are different depending on company structure • Intensive calculation for large portfolios Win/Loss Ratio = Cumulative $ Made Cumulative $ Lost (At company or corporate level) • Simple and easy to explain • Can be used daily, monthly, annually • Comparative measure • Losses are not consistently defined