![]() ![]() The maximum drawdown for an asset can be compared to that for a stock market index in order to evaluate the asset’s performance relative to the market. In addition to associated risk, maximum drawdown also acts as an indicator of market performance. On the other hand, another investor who is willing to take up a higher risk in return for a higher return would choose assets with higher MDD values. While comparing two investment options, an investor who wishes to receive the guarantee of stable returns would most likely choose the option with the lower MDD value. Maximum drawdown is often used to measure the associated risk with a certain asset or a portfolio made up of a basket of assets.īy measuring the difference between the highest peak and the lowest trough values of an investment, MDD shows the volatility of its value in the past, and it provides an almost accurate way of predicting future price movements.Ī low MDD value indicates slight fluctuations in the value of the investment and, therefore, a lesser degree of risk, and vice versa. It can be due to a decline in the market value of the asset or general market turbulence caused by external factors. In broad terms, investment risk refers to the possibility of incurring losses on one’s investment. ![]() Maximum Drawdown as a Measure of Investment Risk In addition to associated risk, maximum drawdown also acts as an indicator for market performance.By measuring the difference between the highest peak and the lowest trough values of an investment, MDD shows the volatility of its value in the past, which provides an almost accurate way of predicting future price movements.Maximum drawdown (MDD) measures the maximum fall in the value of the investment, as given by the difference between the value of the lowest trough and that of the highest peak before the trough.
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