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Computerized Investing > Third Quarter 2013

The Ulcer Index of the AAII Stock Screens

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by Wayne A. Thorp, CFA

In this issue’s Technically Speaking column, we introduce Peter Martin’s Ulcer Index, a measure of investment volatility similar to standard deviation. However, by only focusing on downside volatility, the Ulcer Index overcomes the common criticism of standard deviation that it places upside and downside volatility on equal footing. As long-only investors, we are not concerned with volatility to the upside; in fact, we embrace it.

Beyond allowing us to compare the relative downside risk of investments, as we show in the Technically Speaking column, we can also use the Ulcer Index to calculate the excess return of an investment per unit of downside risk, similar to the way standard deviation is used in the Sharpe ratio. In this installment of Spreadsheet Corner, we show you how to use a spreadsheet to calculate the Ulcer Index of an investment, as well as the Ulcer Performance Index (UPI), or Martin ratio, to determine excess return. Using the monthly return data available for the AAII stock screens, we walk through the calculation of the Ulcer Index for a single methodology and then compare the downside risk of all the screens AAII tracks.

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