Maximum Drawdown (MaxDD) is the largest peak-to-trough decline in a portfolios value over a defined period, expressed as a percentage. It is the single best measure of "how bad did it get?"
Formula: MaxDD = (Trough Value - Peak Value) / Peak Value, applied across every rolling peak-trough pair and the worst (most negative) one kept.
Example: Nifty 50 hit Rs 12,360 on 14 Jan 2020 and crashed to Rs 7,610 on 23 Mar 2020 → MaxDD = -38.4% in 10 weeks. A Rs 10,00,000 portfolio became Rs 6,16,000 — recovery to peak took 9 months.
When to use: Real-world risk assessment, especially when matching a strategy to an investors actual loss tolerance. A 14% CAGR fund with -25% MaxDD is psychologically easier to hold than 18% CAGR with -50% MaxDD.
When NOT to use: As the only risk metric. MaxDD is a single historical worst-case; the next drawdown may be deeper. Combine with volatility, Sharpe, Sortino.
Caveat: Past performance is not indicative of future returns. The worst drawdown is always ahead of you, not behind.
Related terms: Calmar Ratio, Standard Deviation, Rolling Returns.