what is a maximum drawdown mdd 
a maximum drawdown mdd is the maximum observed loss from a peak to a trough of a portfolio before a new peak is attained maximum drawdown is an indicator of downside risk over a specified time period it can be used both as a stand alone measure or as an input into other metrics such as return over maximum drawdown and the calmar ratio maximum drawdown is expressed in percentage terms the formula for maximum drawdown is m d d trough value peak value peak value begin aligned mdd frac textit trough value textit peak value textit peak value end aligned mdd peak valuetrough value peak value understanding maximum drawdownmaximum drawdown is a specific measure of drawdown that looks for the greatest movement from a high point to a low point before a new peak is achieved however it s important to note that it only measures the size of the largest loss without taking into consideration the frequency of large losses because it measures only the largest drawdown mdd does not indicate how long it took an investor to recover from the loss or if the investment even recovered at all maximum drawdown mdd is an indicator used to assess the relative riskiness of one stock screening strategy versus another as it focuses on capital preservation which is a key concern for most investors for example two screening strategies can have the same average outperformance tracking error and volatility but their maximum drawdowns compared to the benchmark can be very different a low maximum drawdown is preferred as this indicates that losses from investment were small if an investment never lost a penny the maximum drawdown would be zero the worst possible maximum drawdown would be 100 meaning the investment is completely worthless mdd should be used in the right perspective to derive the maximum benefit from it in this regard particular attention should be paid to the time period being considered for instance a hypothetical long only u s fund gamma has been in existence since 2000 and had a maximum drawdown of 30 in the period ending 2010 while this may seem like a huge loss note that the s p 500 had plunged more than 55 from its peak in october 2007 to its trough in march 2009 while other metrics would need to be considered to assess gamma fund s overall performance from the viewpoint of mdd it has outperformed its benchmark by a huge margin example of maximum drawdownconsider an example to understand the concept of maximum drawdown assume an investment portfolio has an initial value of 500 000 the portfolio increases to 750 000 over a period of time before plunging to 400 000 in a ferocious bear market it then rebounds to 600 000 before dropping again to 350 000 subsequently it more than doubles to 800 000 what is the maximum drawdown the maximum drawdown in this case is begin aligned text the maximum drawdown in this case is qquad quad frac 350 000 750 000 750 000 53 33 end aligned the maximum drawdown in this case is note the following points 