Dow Jones Industrials: A Different Risk Perspective

The chart above shows the use of an over-looked measure for determining the risk of owning equities. The graphic depicts the Ulcer Index as applied to the Dow Jones Industrial Average (DJIA) since October 1928 - which is when easily accessible archived records are available.

The index is sometimes applied as a metric for indicating the strength or weakness of a portfolio manager's performance. Most pertinently it addresses the issue of how the portfolio has suffered in terms of its maximum draw-down. The notion of draw-down is useful for determining risk and volatility of the returns that one would actually experience in holding a portfolio (in this case the 30 stocks of the DJIA). It differs from the more commonly used Sharpe Ratio which is used and is based on the standard deviations of the returns.

In essence the draw-down is the amount which a portfolio loses, tracked on a periodic basis, from its current level in relation to the high water mark of the portfolio's returns. The high-water mark itself is a moving amount and in regard to the DJIA it can basically be seen as a continuous recording of the maximum value of the index that has been achieved as of the date of measurement. From this high-water mark one can calculate the percentage change for each snapshot in time of the portfolio with respect to the current maximum value that the index has attained.


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