max drawdown

CFA Level III
#1

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?

#2

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

#3

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

#4

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.

#5

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

#6

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.

#7

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

#8

I think it’s 80% no?

#9

Yes Max Drawdown is always in % terms.

#10

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%

#11

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

#12

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

#13

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

#14

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.

#15

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

#16

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

#17

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.

#18

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%.

#19

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??

#20

http://www.analystforum.com/phorums/read.php?13,728440 can you believe this that bigwilly got a mention in my google search …