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Definition – What is Maximum Drawdown?
Maximum Drawdown is the loss from peak to trough. It is listed as a percentage.
Formula – How to calculate Maximum Drawdown
Maximum Drawdown = ((Trough Value – Peak Value) / Peak Value) x 100%
Example
An investment has a trough value of $50,000 and peak value of $75,000.
Maximum Drawdown = (($50000 – $75,000) / $75,000) x 100% = (-$25,000 / $75,000) x 100% = -0.333 x 100% = -33.3%
Therefore, this investment has a maximum drawdown of -33.3%.
Sources and more resources
- Wikipedia – Drawdown (economics) – Explaining the concept of drawdown in the economic sense.
- Investopeida – Maximum Drawdown – A short article overviewing drawdown.