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Give Explanation, Formula & Uses of K-Ratio
What is K-Ratio?
K-Ratio is an important financial tool that is used to estimate mainly two things statistically, the rate of return growth and its regularity of growth over a specified period of time. This is a an extremely potent tool that could be utilized to measure the risk vs reward of investing. This is useful when deciding to invest in stock market and evaluating the profitability of holdings. In this article, we will also look at how K-Ratio is calculated.
K-ratio that has higher numbers will result in a better performance while those that indicate poor numbers will result in have ordinary performance. Investors use this as a tool to compare equities or the performance of one particular asset, to analyze and study its performance over the long run. This predictive analysis helps them decide to take a call and decide general trend line of a variable.
Key Points Briefly
K-ratios, are computed using the value-added monthly index, and assess the consistency of an equity's.
The method entails conducting a linear regression on the logarithmic cumulative return of a Value-Added Monthly Index (VAMI) curve to determine the value of the variable.
When calculating risk, the K-ratio takes into concern not only the yields, but also the sequence in which those returns occur.
The return on a security is measured over time, and the return on equity is a useful tool for evaluating the performance of stocks since it takes the return trend into consideration.
How is K-ratio calculated?
$$k-ratio=\frac{(Slope\:log\:V\:AMI\:regression\:line)}{n(Standard\:Error\:of\:the\:Slope)}$$
Where there are n return periods in monthly return data.
K-ratio was created by Lars Kestner to fill the gap how profits were being calculated and with this formula, one could measure risk vs return. The formula itself is based on time and the change of securities over a period of time. This tool gives investors good option to analyze stocks and also helps the fund managers.
What are the uses of K-Ratio?
K-ratio has lot of benefits for financial professionals like fund managers and even stock market enthusiasts who would like to know more about particular asset before investing. It is highly useful tool that gives predictive information about various assets.
While Lars Kestner was developed by a statistician, it has been used worldwide and in 2003 has seen an updated version of K-ratio. The last known update to K-ratio was done in 2013, where he introduced square root calculation to numerator.
K-ratio is mainly used for to track and analyze the long-term performance of equities and assets.
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