Th his or her own method of trading and performance record. It is in the interest of both the Commodity Futures Trading Commission (CFTC) and the individual investors and sponsors of these advisors to be able to compare and understand both the absolute and relative risks of each trading method. To date the CFTC has only offered a calculation of the compounded annualized rate of return, given as
where INV is the amount of the initial investment and all costs not included in that initial amount, cf is the sum of the distribution(s) (positive sign) and the assessments (negative sign) made during each monthly time period, NAV is the net asset value (less liquidation costs) of the investment at the end of the performance period, and n is the number of monthly time periods. In addition, the following formula is suggested to convert the monthly internal rate of return compounded monthly into the "annual rate of return (compounded annually)," R: R = (1 + Mo.IRR)lZ -1, where Mo.IRR is the monthly internal rate of return compounded monthly expressed as a decimal (Federal Register, 1979).
This method suggested by the CFTC is an acceptable form of a time-weighted rate-of-return calculation. It is unsatisfactory, however, for even the most basic comparisons since it does not include any risks incurred at arriving at the resulting rate of return.
A popular method of evaluating risk has been proposed by Professor William Sharpe of Stanford University and applied to the equity variations of managed commodity accounts by others (Aronson and Rose, 1979). The "Sharpe Ratio" is a relative risk calculation that returns a value based on the annualized rate of return and the annualized standard deviation (variation of returns) after the