Capture ratio
A manager's return as a percentage of the benchmark's, measured separately over rising (upside) and falling (downside) periods. Upside over downside capture above 1 points to a convex, asymmetric pattern.
Where you will meet it
Capture ratio appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Compute and interpret maximum drawdown, drawdown duration, upside and downside capture ratios, the appraisal ratio and the Sortino ratio
“Upside capture is the manager's return in periods when the benchmark rose ÷ the benchmark's return in those periods, and downside capture the same for falling periods; 110% up and 90% down gives a capture ratio of 1.22, a favourable asymmetry.”
- Explain where appraisal measures and associated metrics fall short
“Capture ratios depend on how up and down periods are defined and on the benchmark.”
- Set out the stages of the manager selection process, with due diligence among them
“Quantitative screening follows, using performance appraisal, attribution, style analysis, capture ratios and drawdowns to reach a short list that appears to add value consistently.”
- Explain how maximum drawdown, drawdown duration, capture ratios on the upside and downside, and up/down capture help in assessing managers
“A manager with 80% upside capture and 60% downside capture has an up/down capture ratio of 1.33, a pattern suited to a loss-averse investor willing to trade some upside for protection.”
Practise it
Practise capture ratio until it is automatic: questions that explain every wrong option.
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