Risk✓ Mathematical
◆ The PatternMeasuring worst-case loss from peak — depth, duration, and recovery time
Maximum drawdown is the largest peak-to-trough decline in portfolio value. It answers the question every investor asks: "How bad can it get?" Recovery time — how long to reach a new high — is equally important.
DD(t) = (Peak(t) − Value(t)) / Peak(t)
Drawdown at time t. Max Drawdown = max over all t. Expressed as percentage.
// Interactive equity curve with drawdown shading
Volatility20%
Max DD—
# Python — drawdown analysis import numpy as np cum_returns = (1 + returns).cumprod() running_max = cum_returns.cummax() drawdown = (cum_returns - running_max) / running_max max_dd = drawdown.min() print(f"Max Drawdown: {max_dd:.1%}") # Recovery time underwater = drawdown < 0 recovery_periods = underwater.astype(int).groupby( (~underwater).cumsum() ).sum()
Psychology: A 50% drawdown requires a 100% gain to recover. A 33% drawdown needs 50%. The math is against you — managing drawdown is as important as maximising return.