Risk

Pain Index

A proprietary risk metric, the pain index quantifies the capital preservation tendencies of a manager or index. It measures the depth, duration, and frequency of periods of losses.
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How Is it Useful?

Losing money is a painful experience. The pain index attempts to measure the complete scope of losses. It addresses the shortcoming of only looking at maximum drawdown. It measures risk in terms of absolute returns.

What Is a Good Number?

There is no hard-and-fast rule or breakpoint that separates a good pain index from a bad one. One must compare a manager’s pain index against an appropriate benchmark or peergroup in order to gain an understanding of whether a manager’s pain index is good or bad.

Math Corner: 

The pain index is derived by calculating an integral measuring the area between a curve (e.g., the drawdowns) and the zero line separating periods of gains from losses. The integral is then divided by the length of the X-axis, representing the time frame.

 
 

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