RT Journal Article
SR Electronic
T1 Expected Drawdown Management: <em>An Ex-Ante, Long-Term Approach to Portfolio Construction</em>
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 65
OP 74
DO 10.3905/jwm.2016.18.4.065
VO 18
IS 4
A1 Chi Keong Lee
YR 2016
UL https://pm-research.com/content/18/4/65.abstract
AB This article describes a different approach to constructing portfolios; one based on the investor’s forward-looking, long-term expectation of peak-to-trough loss from investments (expected drawdown). The argument is made that expectation of the future peak-to-trough loss from an investment should be used as a true measure of risk capital that the investor is committing to the investment. This article further introduces a new metric that quantifi es the investor’s ex-ante view that two investments will experience their expected drawdowns at the same time (the expected co-drawdown). These two metrics combine into a new portfolio construction methodology (expected drawdown management) allowing investors to optimally construct portfolios based on controlling for the investor’s expectation of future peak-to-trough loss at the portfolio level.TOPICS: Portfolio construction, risk management