Discounted Maximum Loss

Discounted maximum loss is a risk management technique used to calculate the potential maximum loss on an investment, adjusted for the time value of money. It estimates the worst-case scenario for an investment over a period, factoring in the discount rate to account for future money's value. This method helps investors understand the potential risks associated with an investment and how those risks might change over time. Discounted maximum loss is typically used in portfolio management to prepare for adverse market conditions and protect against significant financial losses.

Example

An investor calculates the discounted maximum loss on a stock portfolio to estimate the worst-case financial loss over the next year, considering the impact of inflation.