Risk of Ruin Calculator
Risk of Ruin - Calculation Approach according to David E. Chamness
David E. Chamness published an article entitled "Minimizing Your Risk of Ruin" in Futures magazine in August 2009. In this article, he describes an approach for determining the RoR, which is calculated without specifying a profit rate. Instead, Chamness uses the loss rate as a reference value for his considerations.
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The parameter set that Chamness uses is based on the following variables:
- Percentage defined as the RoR threshold, which is the maximum loss of a strategy. The defined value is used to determine the reference value "Ruin". Depending on the strategy approach applied, the range is up to 50%. Generally, 30% is used as the definition of ruin.
- The average of all gains and losses realized over the period under consideration, expressed as a percentage.
- The standard deviation of all gains and losses realized over the period under consideration, expressed as a percentage.
Based on the above variables, after Chamness, the RoR can be calculated as follows:
EXP((-2*(average of P&L realized over the period under consideration) × account value in % to be put at risk as the loss ceiling, which according to this logic is set as "ruin) / (standard deviation of P&L realized over the period under consideration × standard deviation of P&L realized over the period under consideration)).
Calculation example (Sample RoR < 0.5): EXP((-2*(.075)*0.50) / (0.110 * 0.11)) = 0.20% Risk of Ruin
