Hi GAT, What is the historical max drawdown for your system running at an annual vol target of 25% and the Sharpe Ratio?

"Is the sum of all position risk values divided by the Instrument Diversification Multiplier a good estimate?" Not really. The IDM is a long run measure of the correlation between subsystems, not between returns on positions. I just use standard risk measures assuming gaussian returns, eg http://faculty.washington.edu/ezivot/econ424/portfolioTheoryMatrix.pdf and measuring correlation / vol over recent history (say a few months and a months lookback respectively). GAT

It seems to me that max DD is a weird metric because it doesn't account for time. For longer time periods max DD is going to be larger simply because you're taking more samples of the random distribution. Put another way, as time approaches infinity, max DD is going to be 100% with probability 1.

Oh yeah it's a stupid statistic. The other thing I don't like is the fact that it's a single data point, so it's statistically highly non robust. But people seem to want to know it. They should bear in mind that max DD isn't the maximum you can lose. You should assume that 100% is the maximum you should use. GAT PS I'm not sure if you're guaranteed to get to -100% if you're using proper capital scaling, but it's true that at an infinite horizon you'll see 99.999999% at some point.

GAT I'm waiting on delivery of your book and downloaded your spreadsheet on ewma calculation of standard deviation. In the mean time i was wondering if you use the dollar change or percent change when calculating vol. Also, when the forecasted vol for today do you calculate the ewma for the entire series or just the last N samples of price or percent change?

It depends on what I'm using the vol for, sometimes I use %, sometimes price. You don't need to use the whole series; something like 5 times the length of the EWMA lookback will give you an accurate enough answer. Rob

I've always used log change in creating a covariance matrix. Under what circumstance(s) would you use price rather than price change? Also, would you use ewma in calculating correlation as well?

Sorry I should have said, sometimes I use % price, sometimes delta (price). I think log change will give you similar results to % price (I also think you mean change(log(price)), rather than log (change)!) I use this for position scaling. The latter is useful for scaling trading rules, eg EWMAC = EWMA_fast - EWMA_slow / vol( delta_price) This is explained in the book, appendix B. Correlations - sure you can use exponential weighting of correlations. Again normally % would be appropriate here. Rob

Sorry for the late notice, but if you're interested I'm doing a webcast as part of the MTA educational series in just under 90 minutes ( 2pm UK time 9am EST) Details here https://www.mta.org/event/webcast-presentation-featuring-robert-carver/?instance_id=3151 Log in here: http://go.mta.org/lobby030216 GAT