Definition
Maximum drawdown measures the largest percentage drop from a peak to a subsequent trough before a new peak is reached. It captures the worst-case scenario an investor would have experienced. Unlike volatility measures, drawdown shows actual historical losses. A strategy with 50% maximum drawdown means an investor at the worst time would have lost half their investment before recovery. Drawdowns are particularly important for evaluating leveraged strategies and for investors who cannot tolerate large interim losses.
Formula
Example
A portfolio rises from $100,000 to $150,000, then falls to $90,000, and eventually recovers to $200,000. Maximum drawdown is ($90,000 - $150,000) / $150,000 = -40%, even though the final return is positive.
FAQ
What is Maximum Drawdown?
The largest peak-to-trough decline in portfolio value over a period.
How do you calculate Maximum Drawdown?
A common formula for Maximum Drawdown is: 最大回撤 = (谷底值 - 峰值) / 峰值 x 100%
Why is Maximum Drawdown important?
Maximum Drawdown helps investors evaluate risk metrics and make more informed decisions.