max drawdown

assuming the NAV of a fund of each time period is the following, what is the max drawdown? t1 = 10 t2 = 8 t3 =6 t4 = 8 t5 = 4 t6 = 2 is it 6 or 8?

8 b/c the HWM is 10 and they have gone done to 2 and still have not reached their HWM.

isnt max draw down based on a % - hence maximum drawdown was during t6?

for anyone who has schweser notes handy, my question arose from the chart on pg 96 of book 4. it seems to contradict BW’s answer (which i agree with). i think it might have to do with measurement period. i.e. max monthly drawdown however schweser doesn’t make that clear with this chart.

yes, edge you are correct IMO at least that it is based on a % drawdown, not absolute $.

i just jumped to my schweser notes and cfai - the latter was not very clear at all. but if we just remember it is a % then it makes more sense, I think. man, good question though.

don’t have the books in front of me but max drawdown is definitely only comprised of consecutive losses - - once a fund bounces back one month it is completely reset - - i look at these reports weekly – all about what is the maximum they’ve lost in one straight shot not sure if i’m saying that clearly but answer to your question above is definitely 6 - from t4 to t6; don’t look at t1 bc fund rebounded in t4

I think it’s 80% no?

Yes Max Drawdown is always in % terms.

not sure that max drawdown HAS to be a % but that is usually how i see it - - so i’d say the percentage here is (2/8-1) = 75%

sorry - point i was trying to make is that you don’t look at high water mark - - just most recent high - - but i agree, should probably be % here

I believe its 80% from 2/10 -1.

luckily i don’t think that will be how they phrase the question - - they’ll give us the max DD but real world think the answer is 75%; if you guys have seen something that says CFA Way is 80%, run with it - - but they’re wrong - - it’s essentially a volatility measure - how much can you lose in one stretch just called our IR department that deals with this (and she’s a CFA) and they say from most recent high - - not high water mark not enough points to continue to worry about though

I dont think that’s entirely true Cville. If my NAVs are this: Jan: 1000 Feb: 950 Mar: 960 Apr: 900 My drawdown is from the 1000 to the 900 not from 960 to 900. I look at this stuff a lot but to be honet the computer calculates it for me and I’m having a brain fart right now, but I’m pretty sure it would be based off the 1000 to 900.

thanks cville…especially for putting the call into IR. FWIW, that’s consistent w Schweser so i’m going with it.

I think your IR person is referring to a Drawdown and not a Max Drawdown…

CFAI books: “maximum drawdown is the largest difference between a high water and subsequent low” that’s al they say. i’m just asking because i’ve seen them do things like this. you think you know the formula and then they throw a curveball at you trying to apply it in a real world scenario…which makes sense.

So I’m correct, right. Its the difference between teh HWM and what ever the lowest point was before the HWM was reached again. For instance Jan: 1000 Feb: 950 Mar: 960 Apr: 900 May: 960 Jun: 1000 My Max Drawdown during the period was 1000-900 = 100 or 10%.

i just hope they give us the max drawdown # - - for what its worth, my buddy at a FoF is arguing the same point as you BW - - but i’ve now lost all respect for his judgment – he won’t even attempt L1 - so who cares what he thinks??,728440 can you believe this that bigwilly got a mention in my google search …