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Re: Ulcer index formula



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<DIV>Perhaps their book will contain more details.</DIV>
<DIV><BR>Regards,<BR>Ton Maas<BR><A 
href="mailto:ms-irb@xxxxxxxxxxxxx";>ms-irb@xxxxxxxxxxxxx</A><BR>Dismiss the 
".nospam" bit (including the dot) when replying.</DIV>
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            <BLOCKQUOTE>
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              <B><FONT size=+1>MUTUAL FUNDS&nbsp; 
              <HR>
              </FONT><FONT size=+4>The Ulcer Index&nbsp; 
              <HR>
              </FONT><I>by Gary H. Elsner, Ph.D.&nbsp; 
              <HR>
              </I></B><I><FONT size=+1>A good risk index can be useful in the 
              selection of stocks, funds, and trading systems. Here, then, is 
              the ulcer index, why it is superior to the standard deviation 
              statistic, and how it can be used in a variety of personal 
              investing or professional money management 
              applications.&nbsp;</FONT></I> 
              <HR>
              </CENTER><FONT size=+2>W</FONT>hat is risk, and how is it 
              measured? Risk is commonly defined in terms of the volatility of 
              an investment's total return or the volatility of the price. The 
              standard deviation is a good measure of volatility, since it 
              measures the amount of variation around the average and is 
              probably the most widely used measure of financial risk. But the 
              standard deviation has two weaknesses for financial instruments. 
              First, it measures the variation from the average in both the up 
              (good) direction as well as the down (bad) direction. Second, the 
              standard deviation does not distinguish between short or long 
              sequences of losses. Investors are only concerned about downside 
              risk (or the potential for losses), whereas upside changes or 
              rapid increases in value create profits. 
              <CENTER>
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              <BLOCKQUOTE>
                <BLOCKQUOTE><B>FIGURE 1: FIDELITY EMERGING MARKET. </B>The 
                  ulcer index uses only the retracements from the price peaks 
                  (the shaded areas) in the 
              calculation.</BLOCKQUOTE></BLOCKQUOTE>The standard deviation may 
              still be the most widely used because it has been around longer 
              than other risk indices and most computer programs have the 
              capability of calculating it. However, there is another measure of 
              risk, superior to the standard deviation: the ulcer index. 
              <P>Peter G. Martin and Byron B. McCann are credited with the 
              creation of the ulcer index. They describe it in their 1989 book, 
              <I>The Investor's Guide To Fidelity Funds</I>. (To see the 
              calculation for the ulcer index, see the sidebar "The ulcer 
              index.") In contrast to the standard deviation, the ulcer index 
              has none of the aforementioned weaknesses since it calculates 
              retracement, which is the tendency for values to fall from 
              previous highs, by measuring the depth of the drop and the time 
              that it takes the performance measure to recover to the original 
              level. 
              <P>Another advantage is that the ulcer index doesn't measure 
              downside changes from the average but from the previous high. For 
              example, in Figure 1, all of the shaded areas are included in the 
              calculation of the ulcer index. The measurement includes every 
              drop in performance in the period being studied. Funds or trading 
              systems with high ulcer index readings should be avoided unless 
              they have such exceptionally high returns that the risks are 
              justified. In addition, dividing returns by the ulcer index 
              produces a useful risk-adjusted return measurement.</P></BLOCKQUOTE>
            <CENTER>
            <HR width="100%">
            <I>Gary Elsner, Ph.D., is editor of the mutual fund timing 
            newsletter </I>Achieve <I>Profits (Website 
            http://www.AchieveProfits.com). He may be reached via E-mail at 
            gelsner@xxxxxxxxxxxxxxxxxxx</I></CENTER>
            <BLOCKQUOTE>
              <CENTER>
              <H5><I>Excerpted from an article originally published in the April 
              1999 issue of Technical Analysis of STOCKS &amp; COMMODITIES 
              magazine. All rights reserved. © Copyright 1999, Technical 
              Analysis, Inc.</I></H5></CENTER></BLOCKQUOTE>
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