Definition
Drawdown measures the largest percentage loss from a historical peak to a subsequent trough. Maximum drawdown (Max DD) is the worst peak-to-trough decline ever experienced. Drawdown duration measures how long it takes to recover. These metrics are critical for assessing the real-world pain an investor experiences, which standard deviation alone cannot capture.
functions Formula
Drawdown = (Peak Value − Trough Value) / Peak Value × 100%
lightbulb Example
A portfolio peaks at $1M, drops to $700K during a bear market, then recovers. Max drawdown = ($1M-$700K)/$1M = 30%. Recovery took 18 months. This 30% loss requires a 43% gain just to break even.
verified_user Key Points
- Measures worst peak-to-trough decline
- More intuitive than volatility for assessing risk
- Recovery requires larger percentage gain than the loss
- Max drawdown and drawdown duration are key metrics