Maximum Downside Exposure
Maximum downside exposure values the maximum downside to the portfolio. In other words, it states the most that the portfolio could lose in the event of a catastrophe. As such, MDE obviates the need to worry about the market's unpredictable swings as it virtually "eliminates" downside surprises. The formula:
The main benefit of MDE is that – unlike probabilistic risk models – it appropriately factors in all risks to the portfolio without looking at historical data and relying on simplistic statistical assumptions that don't correspond to the real world. This makes MDE a very robust risk management tool.
