A.I.M. Users Bulletin Board

[Qarel]

Sharpe vs UPI! Thank you Don. Of course, when I started my foray into Risk Analysis territory, I started to stumble over lots of other ways to measure Risk/Reward. Another one I found (and liked) was:

http://www.aegisfund.com/english/library/articles/art_risks.html

But I had already started on the Sharpe Ratio, so I stayed with that measurement.

The Ulcer Index (or Ulcer Prevention Index; beautiful names!) only measures downside risk, and the Sharpe ratio both downside and upside risk. That the UI still doesn't make much difference from the Sharpe Ratio becomes clear when we look at the calculation:

1. Square all the daily drawdowns of the vehicle or strategy.
2. Sum all the daily squared drawdowns.
3. UI = the square-root of the sum.

Now an investment can have a higher UI for a combination of two reasons:

- it has a lower return (by comparable volatility), and so more (or greater) daily drawdowns
- it is more volatile (by comparable return), and the greater drawdowns are compensated by greater upswings.

We try to avoid investments with the first characteristic, so measuring only the downside volatility for UI in practice means measuring both upside and downside volatility.

Regards,

Karel