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Hi all,
I recently bought this software MCS Pro that performs portfolio
Monte Carlo simulations through tradestation strategies. It outputs a
distribution that displays the probability of achieving a drawdown that
would exceed a certain value over a fixed period of time. So, there is a
list of drawdown values with associated probabilities of a drawdown
exceeding that amount. The strange part is that the probabilities seem
incredibly high. One system I tested had a maximum actual drawdown of
83,000 over a ten year period. But when I look at the probability of a
drawdown exceeding 83,000 over a one year period it is 63%. I am no
mathematician, but to me if the probability of witnessing a greater
drawdown in one year is 63%, the probability of witnessing it in 10
years would be 99.9952% (1 minus the probability of it not happening
(.37) raised to the 10th power). I know these events may not be
independent, but with these odds I would expect to witness at least one
drawdown greater than 83,000 over ten years. I am missing something
here? I feel like I am taking crazy pills. Any assistance would be
appreciated.
Gabriel
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