Quantifying pain via drawdown size by Richard Harrison
ARTICLE SYNOPSIS ...Quantifying pain via drawdown size by Richard Harrison
Most investors want the greatest return on their investment as long as their pain threshold is not exceeded along the way. The amount of pain an investor experiences depends not only on the size of drawdowns, but also on how long the drawdowns last.
An investor can quantify both pain components of drawdown on an equity vs. time plot by measuring the area of the drawdown (DA). DA is the sum of the drawdown percentages for each time period for the duration of the drawdown. Summing the individual DAs results in the total drawdown area (TDA...