Maximum Drawdown

A portfolio suffers Drawdown whenever it loses money. A drawdown at given time t is defined as the difference between the current portfolio value (assuming no redemption or cash infusion) and the global maximum of the portfolio value occurring before time t.

Maximum Drawdown is the difference between the global maximum of the portfolio value with the global minimum of the portfolio value occurring after the global maximum.

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Maximum Drawdown Duration is the longest it has taken for the equity curve to recover losses.

Drawdowns are measured in percentage terms, numerator is loss of equity since reaching high watermark and denominator is equity at high watermark.

Maximum drawdown and the Maximum Drawdown Duration do not typically overlap over the same period.

A drawdown is very critical emotionally for an investor. An investor must ask how deep and how long a drawdown can be tolerated. An investor must select strategies with minimum drawdowns.