# Maximum downside exposure

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In [financial investment](/source/Financial_investment), the **maximum downside exposure (MDE)** values the maximum downside to an [investment portfolio](/source/Investment_portfolio). In other words, it states the most that the portfolio could lose in the event of a catastrophe. As such, MDE obviates the need to worry about the market's unpredictable swings as it virtually "eliminates" downside surprises. The formula:

- MDE = unhedged exposure/total portfolio value.

(For example, if half of the funds are in [inflation](/source/Inflation)-protected cash, and the other half in stocks, the portfolio could not lose more than 50% – the portfolio's MDE.)

The main benefit of MDE is that – unlike probabilistic risk models (such as [VaR](/source/Value_at_risk)) – it appropriately factors in all risks to the portfolio without looking at historical (and often erroneous) data and relying on simplistic [statistical assumptions](/source/Statistical_assumption) that don't correspond to the real world. This makes MDE a very robust risk management tool.[1][2]

## References

1. Marjanovic, Boris (18 November 2015). ["What Turkeys Can Teach Us About Risk Management"](http://seekingalpha.com/article/3694906-what-turkeys-can-teach-us-about-risk-management). *Seeking Alpha*. Retrieved 18 November 2015.

1. Nocera, Joe (2 January 2009). ["Risk Mismanagement"](https://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=0). *The New York Times*. Retrieved 19 November 2015.

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