Investors’ objectives are generally expressed as a combination of risk and return targets. Defining the return target is usually relatively simple – but the definition of risk targets is less straightforward.
One conventional approach is to consider “volatility”, that is, the average variation of portfolio return over time. For many investors, however, “maximum drawdown” is a more relevant statistic, as it points to the maximum loss of value. To limit the maximum drawdown, investors typically follow broadly diversified investment strategies that include a tactical asset allocation component designed to avoid losses as often as possible.
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