Maximum Drawdown Calculator
Calculate maximum drawdown percentage and dollar loss between peak portfolio value and subsequent trough.
What is Maximum Drawdown?
Maximum Drawdown (MDD) is a key downside risk metric that measures the maximum peak-to-trough decline of an investment portfolio before a new peak is achieved. MDD quantifies the worst-case financial loss an investor would have experienced during a specific timeframe.
Maximum Drawdown Formula
Maximum Drawdown is calculated as the percentage loss from peak portfolio value to trough portfolio value:
$$\text{MDD} = \frac{\text{Trough Value} - \text{Peak Value}}{\text{Peak Value}} \times 100\%$$To recover back to the original peak value, the required percentage gain is calculated as:
$$\text{Required Recovery Gain} = \left(\frac{\text{Peak Value}}{\text{Trough Value}} - 1\right) \times 100\%$$Why Maximum Drawdown Matters
Because financial losses are asymmetrical, larger drawdowns require exponentially larger gains to breakeven:
- A $10\%$ drawdown requires an $11.11\%$ gain to recover.
- A $25\%$ drawdown requires a $33.33\%$ gain to recover.
- A $50\%$ drawdown requires a $100\%$ gain to recover.
Related Financial Tools
Evaluate long term deposit returns using our Maturity Value Calculator or evaluate stock cap sizes with the Market Capitalization Calculator.
Frequently Asked Questions
What is a good maximum drawdown percentage?
Lower maximum drawdown indicates lower downside volatility. Conservative portfolios aim for MDD under 10-15%, whereas aggressive growth equity strategies may experience MDD of 30-50% during market crashes.
How does MDD differ from standard volatility?
Standard deviation measures bidirectional price variance (both up and down). Maximum drawdown focuses exclusively on tail risk and capital preservation during downturns.
Why does a 50% loss require a 100% gain to recover?
If a $100 portfolio drops by 50%, it becomes $50. To return from $50 back to $100 requires gaining $50 on a $50 base, which is a 100% return.
Can maximum drawdown change over time?
Yes. MDD is continuously recalculated over historical data as new asset price peaks and market troughs occur.
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