You use Compound Annualized Gain to measure investment return and Maximum Draw Down to measure investment risk. What is Maximum Draw Down?
Maximum Draw Down is the greatest percentage prior-peak-to-subsequent-valley decline suffered by an investment during a specific timeframe. Maximum Draw Down may be applied to an individual stock or mutual fund, a specific trading strategy, or an entire portfolio. It provides an easy-to-grasp, absolute measure of risk to which any investor can relate. This makes Maximum Draw Down a far more useful measure of risk than Beta — which only measures the volatility of an investment versus a benchmark, such as the S&P 500 Stock Index. And it makes Maximum Draw Down a far simpler measure of risk than the Ulcer Index, which measures draw downs in terms of areas beneath a curve and, accordingly, is not easily explained or computed. An illustration of Maximum Draw Down is available by clicking here.
