Maximum Drawdown
The largest peak-to-trough decline over a period.
What is Maximum Drawdown?
The worst loss an investor would have lived through. More behaviorally relevant than standard deviation because it is the number that makes clients sell. Recovery math is asymmetric: a 50% loss needs a 100% gain to get back.
Maximum Drawdown: a worked example
The S&P 500's 2007-2009 drawdown was about 57%.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.