calculating the calmar ration (for the mathematically inclined)

["John Holton" <jgh1@xxxxxxxxxxxx>]

I recently started using genetic algorithms to optimise systems. Essentially
the optimiser will try and find the best solution based on a fitness
function. I've decided to use the calmar ratio as my fitness function. The
calmar ratio is defined as annualised compound return / drawdown.

Now my system trades a single futures contract for the entire period. I.e it
is not increasing the contract size as the the equity increases. So the
monthly returns are dimishing in percentage terms as the capital increases.
So I need a way of calculating the compounded return.

I calculate the annulised return using the following excel formula:

annualised return =

{=(product(monthly_returns+1)^12/no_of_months)-1)

but here's the question. In order to calculate each monthly return I take
the balance at the end of each month, subtract the starting balance and
divide the result by the equity at the 'start of trading'. Is this correct?
(If I divide the result by the balance at the beginning of each month I get
an ever dimishing monthly percentage gain). Similarly I calculate the
maximum drawdown by measuring the drop from the highest equity peak against
the starting capital. Is this correct?

thanks

john holton