![]() ![]() Subsequently, it more than doubles to $800,000. It then rebounds to $600,000, before falling again to $350,000. The portfolio rises to $750,000 over a period of time, before plummeting to $400,000 in a fierce bear market. Suppose an investment portfolio has an initial value of $500,000. Let’s consider an example to understand the concept of maximum drawdown. While other metrics should be considered to assess the Gamma fund’s overall performance, from an MDD perspective, it has outperformed its benchmark by a huge margin. While this may seem like a huge loss, it should be noted that the S&P 500 fell more than 55% from its peak in October 2007 to its low in March 2009. For example, a hypothetical American long-only Gamma fund has existed since 2000 and had a maximum drawdown of -30% in the period ending in 2010. In this regard, special attention should be paid to the time period considered. However, comparing between VYM and SCHD, I find SCHD has higher. Both investments have delivered pretty close results over the past 10 years, with VOO having a 12.57 annualized return and VTI not far behind at 12.01. It has a current yield of 3.0 and solid long-term total returns. The year-to-date returns for both stocks are quite close, with VOO having a 20.09 return and VTI slightly lower at 19.60. The MDD should be used in the right perspective to reap the maximum benefit. Follow Summary VYM is a high-yielding ETF offered by Vanguard. The worst possible maximum drawdown would be -100%, which means that the investment is completely worthless. If an investment never lost a penny, the maximum drawdown would be zero. For example, two screening strategies may have the same average outperformance, tracking error and volatility, but their maximum drawdowns against the benchmark may be very different.Ī low maximum drawdown is preferable as it indicates that the losses from the investment were small. Maximum drawdown (MDD) is an indicator used to assess the relative risk of one equity screening strategy versus another, as it focuses on capital preservation, which is a key concern for most investors. Since it only measures the maximum drawdown, the MDD does not indicate how long it took the investor to recover from the loss, or whether the investment recovered at all. However, it is important to note that it only measures the size of the largest loss, without taking into account the frequency of large losses. Maximum drawdown is a specific measure of drawdown that looks for the largest movement from a high point to a low point before a new peak is reached. Maximum Drawdown is expressed in percentage terms. It can be used either as a stand-alone measure or as an input into other metrics such as Return over Maximum Drawdown and Calmar Ratio. Maximum drawdown is an indicator of downside risk over a given period of time. ![]() What is a maximum drawdown or Maximum Drawdown (MDD)?Ī maximum drawdown (MDD) is the maximum loss observed from a peak to a trough in a portfolio, before a new peak is reached, as illustrated in the figure. ![]()
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