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The APT Part 1 : Don't get trapped in a Pitfall !

In this note, we argue that classic risk measures (such as volatility) do not consider the path followed by returns and leave out the risk of potential large drawdowns. We also show that using path dependent measures such as the Ulcer Index or Conditional Drawdown at Risk adds valuable information to any investment decision. We propose a new measure of the global risk: The Serenity Ratio which reveals both the average and extreme risk carried by an investment. We conclude that this indicator can be used in a modified version of the Modern Portfolio Theory [Markowitz (1952)] and help investors choose the best strategies for their portfolio.

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