The Zephyr K-Ratio quantifies two things: the appreciation of wealth and the consistency of that wealth creation.
Like many statistical ratios, the K-Ratio is a return-vs.-risk tradeoff metric, with the numerator being an expression of return and the denominator a measure of risk. The numerator, the measure of return, is the slope of a best-fit regression line superimposed over a cumulative return series. The steeper the slope, the larger the number, the faster the rate of appreciation of wealth.
The denominator, the measure of risk, is the standard error of that best-fit regression line. A small standard error indicates the actual path of appreciation or wealth creation closely resembles a straight line of consistent growth and no deviation from the path of growth. The larger the standard error the more the actual data series strays from an idealized straight line.
One hopes to see a positive Zephyr K-Ratio, as a positively sloped numerator indicates appreciation of wealth. A K-Ratio of “0” indicates no wealth was created or destroyed over the time horizon; a negative K-Ratio indicates the ending value of the investment is less than that starting value and wealth has been destroyed. The larger the K-Ratio the better. NOTE: in order to adjust for the compounding effect of a geometrically-linked return series, the regression is applied on a log scale (“trend return”).
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