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Computerized Investing > Third Quarter 2013

The Ulcer Index

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by CI Staff

Over the last few issues, we have introduced various risk-adjusted return measures in the Fundamental Focus column. As we have discussed in these columns, most risk-adjusted measures rely on standard deviation as the measure of volatility, or risk. One flaw with using standard deviation is that it accounts for both upside and downside volatility, treating them equally. However, if you are a long-only investor, you are not concerned with upside volatility. In fact, you desire it.

Furthermore, standard deviation is not impacted by the sequence of gains and losses. Therefore, it ignores a string of losses that result in significant drawdowns in your investment’s value. Drawdown is the percentage by which an individual security, portfolio or strategy is down from its all-time high or highest level over a specific period.

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