What is maximum downside exposure?

Maximum downside exposure, or MDE, is the evaluation of the maximum downside to a portfolio. It lets you know how much your portfolio could possibly lose in the event of a catastrophe. Because of this MDE alleviates the need to worry about the market’s volatile swings.

Where have you heard about maximum downside exposure?

It is dissimilar to probabilistic risk models in that it takes into account all possible risk without looking into any historical data and leaning on basic statistical tools that don't correlate to the real world. This make maximum downside exposure a very strong risk management tool.

What you need to know about maximum downside exposure.

Not only is maximum downside exposure a robust and reliable risk management tool, its formula is easy to calculate:

MDE = Unhedged exposure/total portfolio value

For example, if you have 50% of your money in bonds and the other half in cash, there is no way you could lose more than half of your funds at any one time. Investors, traders and analysts alike use many different methods to estimate the success of an investment. This risk management method is amongst the most robust.