Performance & risk

Maximum Drawdown (MDD)

The largest peak-to-trough percentage decline before a new peak.

01 / Definition

What Maximum Drawdown Means

Maximum drawdown measures the worst historical loss from a portfolio high to a later low. It is path-dependent: it compares every value with the highest value reached before it, not just two calendar endpoints.

02 / Calculation

Maximum Drawdown Formula

MDD = minₜ [(Valueₜ − Peakₜ) ÷ Peakₜ]

03 / Worked Example

How to Read the Result

A portfolio peaks at $125,000 and falls to $92,500. The drawdown is −26%, commonly reported as a 26% maximum drawdown.

04 / Boundaries

Limitations

It is historical, not a bound on future loss.
Start date and valuation frequency can change the result.
It does not distinguish a brief fall from a long recovery.

05 / Questions

Common Questions

Is drawdown the same as a period loss?

No. A period return compares 2 endpoints; drawdown compares each point with its prior peak.