We value your feedback.
Take our survey and automatically be enter to win anyone of the following:
Yeti Cooler, Amazon eGift Card, and Movie eGift Card!
Course Of The Month
1 day, 16 hours left to enrollBecome a Premium Member and unlock a new, free course in leading technologies each month.
Solved
Opinions wanted on math related questions e.g. Annualised volatility
Posted on 2011-09-09
Hi
I'm currently creating some policy frameworks and models relating to risk in the hedge fund landscape and have a few questions which I would like input from people in the mathematical background.
1. When talking about ANNUALISED VOLATILITY, what do people consider this to mean? Is this annualised VOL since inception of a fund, annual vol of the last x number of monthly returns, annualised vol of the last full year or annualised vol of current year to date? In nearly all situations I have seen, there have been no clarifications on the investment manager's data sheets, so it can be interpreted differently unless the definition is considered standardised.
2. What do people define as "draw-down"? I consider it to mean, if a fund has 12-months of returns and three of those (non consecutive months) were losing months, then I would say that the fund had 3 monthly drawdowns.
But then when I google search it, I see the some definitions are peak to trough which could mean 3 positive months to form a peak, two consecutive up month and then 4 down months. The highest to the lowest would then be the drawdown as a percentage. This seems odd to me.
I have even seen some people define drawdown as "only consecutive down months".
View appreciated.
I'm currently creating some policy frameworks and models relating to risk in the hedge fund landscape and have a few questions which I would like input from people in the mathematical background.
1. When talking about ANNUALISED VOLATILITY, what do people consider this to mean? Is this annualised VOL since inception of a fund, annual vol of the last x number of monthly returns, annualised vol of the last full year or annualised vol of current year to date? In nearly all situations I have seen, there have been no clarifications on the investment manager's data sheets, so it can be interpreted differently unless the definition is considered standardised.
2. What do people define as "draw-down"? I consider it to mean, if a fund has 12-months of returns and three of those (non consecutive months) were losing months, then I would say that the fund had 3 monthly drawdowns.
But then when I google search it, I see the some definitions are peak to trough which could mean 3 positive months to form a peak, two consecutive up month and then 4 down months. The highest to the lowest would then be the drawdown as a percentage. This seems odd to me.
I have even seen some people define drawdown as "only consecutive down months".
View appreciated.
[X]
Welcome to Experts Exchange
Add your voice to the tech community where 5M+ people just like you are talking about what matters.
- Help others & share knowledge
- Earn cash & points
- Learn & ask questions
3-
2
- +1
7 Comments
You have discovered a common problem in this area. A lot of terms are either poorly defined or misunderstood. It is important that you clarify what you mean by those terms when you use them to avoid confusion.
If the word volatility was used by itself, it should be taken to mean volatility since the beginning.
Annual volatility should refer to the volatility over a year.
A drawdown is technically the difference between a peak and a trough and is usually expressed as a percentage. investopedia defines it well. http://www.investopedia.com/terms/d/drawdown.asp#axzz1XSeaiSI3
If the word volatility was used by itself, it should be taken to mean volatility since the beginning.
Annual volatility should refer to the volatility over a year.
A drawdown is technically the difference between a peak and a trough and is usually expressed as a percentage. investopedia defines it well. http://www.investopedia.com/terms/d/drawdown.asp#axzz1XSeaiSI3
Your idea of a "drawdown month" as a month that is in the "drawdown period" is not a standardized term but it should be readily apparent what you mean to anyone knowledgeable in the field.
Hi
yes I saw the investopedia definition some time ago, but I didnt necessarily agree with it. Because I have seen different people use it differently, I found it quite frustrating not knowing exactly what they were referring to incase it meant something else.
Thanks. Let's see if anymore people comment.
yes I saw the investopedia definition some time ago, but I didnt necessarily agree with it. Because I have seen different people use it differently, I found it quite frustrating not knowing exactly what they were referring to incase it meant something else.
Thanks. Let's see if anymore people comment.
Just for reference
Collins English Dictionary: drawdown [1]
2. a continuous decline in an investment or fund, usually expressed as a percentage between its highest and lowest levels
So it's really just a decrease from the peak but usually refers to a trough (low point). It can refer to the drop from the peak to the current value if it is in a declining state. I missed that earlier, sorry.
Now, from a mathematical standpoint, a 'peak' is defined according to your frame of reference. If a fund has been in steady decline all month, then the peak for that month would be day one. So a monthly drawdown could be defined as a month that ends lower than it started. But, if you used the life of the fund prior to that month as the frame of reference, then the peak could be in a different month. The definition isn't rigorous enough to force everyone to use it the same way.
The important thing is to just be consistent and explicit in your own usage of any ambiguous term.
[1] "drawdown." Collins English Dictionary - Complete & Unabridged 10th Edition. HarperCollins Publishers. 09 Sep. 2011.
Collins English Dictionary: drawdown [1]
2. a continuous decline in an investment or fund, usually expressed as a percentage between its highest and lowest levels
So it's really just a decrease from the peak but usually refers to a trough (low point). It can refer to the drop from the peak to the current value if it is in a declining state. I missed that earlier, sorry.
Now, from a mathematical standpoint, a 'peak' is defined according to your frame of reference. If a fund has been in steady decline all month, then the peak for that month would be day one. So a monthly drawdown could be defined as a month that ends lower than it started. But, if you used the life of the fund prior to that month as the frame of reference, then the peak could be in a different month. The definition isn't rigorous enough to force everyone to use it the same way.
The important thing is to just be consistent and explicit in your own usage of any ambiguous term.
[1] "drawdown." Collins English Dictionary - Complete & Unabridged 10th Edition. HarperCollins Publishers. 09 Sep. 2011.
Active today
"yes I saw the investopedia definition some time ago, but I didnt necessarily agree with it. Because I have seen different people use it differently, I found it quite frustrating not knowing exactly what they were referring to incase it meant something else."
-
You have hit upon the basic difficulty. There is no definition with which somebody does not disagree.
Sometimes this is because people waqnt to use a definition that shows whatever they are doing in the best possible light.
This is a common difficulty. Consider efforts to standardize computer useage. Creating html definitions is like pulling teeth. Even industry organizations have trouble. The hedge fund industry has no industry wide organization to enforce standard definitions. You are stuck with ambiguity.
-
You have hit upon the basic difficulty. There is no definition with which somebody does not disagree.
Sometimes this is because people waqnt to use a definition that shows whatever they are doing in the best possible light.
This is a common difficulty. Consider efforts to standardize computer useage. Creating html definitions is like pulling teeth. Even industry organizations have trouble. The hedge fund industry has no industry wide organization to enforce standard definitions. You are stuck with ambiguity.
I agree with your comments, and the definition i.e. from peak to its lowest level. I guess, like you pointed out, people dont always name their time horizon, which I suppose by default is the whole period available.
However, as you also pointed out the defintion, the word "continuous" has significance, because I equate "continuous" with "consecutive" so that if the fund declines every month by 1% (from say 20%) in a 12-month period, except for the 12th month in which it increases by 5%, the drawdown could be argued that it is the difference between 20% (starting) and 14% (end period), therefore drawdown is 6%. That is one way of looking it I think?
The other, using the same example except this time the positive month is month 6 where again it increases by 5% that month, then I would say the drawdown is capped at the point of the break in the overall trend, so that by the end of month six, the fund has increased by 5% back to 20% again.
However, as you also pointed out the defintion, the word "continuous" has significance, because I equate "continuous" with "consecutive" so that if the fund declines every month by 1% (from say 20%) in a 12-month period, except for the 12th month in which it increases by 5%, the drawdown could be argued that it is the difference between 20% (starting) and 14% (end period), therefore drawdown is 6%. That is one way of looking it I think?
The other, using the same example except this time the positive month is month 6 where again it increases by 5% that month, then I would say the drawdown is capped at the point of the break in the overall trend, so that by the end of month six, the fund has increased by 5% back to 20% again.
Featured Post
ZipGrep is a utility that can list and search zip (.war, .ear, .jar, etc) archives for text patterns, without the need to extract the archive's contents.
One of a set of tools we're offering as a way to say thank you for being a part of the community.
Question has a verified solution.
If you are experiencing a similar issue, please ask a related question
A Guide to the PMT, FV, IPMT and PPMT Functions
In MS Excel we have the PMT, FV, IPMT and PPMT functions, which do a fantastic job for interest rate calculations. But what if you don't have Excel ?
This article is for programmers looking to re…
This is a research brief on the potential colonization of humans on Mars.
Although Jacob Bernoulli (1654-1705) has been credited as the creator of "Binomial Distribution Table", Gottfried Leibniz (1646-1716) did his dissertation on the subject in 1666; Leibniz you may recall is the co-inventor of "Calculus" and beat Isaac…
Finds all prime numbers in a range requested and places them in a public primes() array. I've demostrated a template size of 30 (2 * 3 * 5) but larger templates can be built such 210 (2 * 3 * 5 * 7) or 2310 (2 * 3 * 5 * 7 * 11).
The larger templa…
Suggested Courses
Course of the Month1 day, 16 hours left to enroll
Earn Certification
Lean Six Sigma Yellow Belt
$99.00$89.10
717 members asked questions and received personalized solutions in the past 7 days.
Join the community of 500,000 technology professionals and ask your questions.