Drawdown

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DEFINITION of 'Drawdown'

The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.

INVESTOPEDIA EXPLAINS 'Drawdown'

A drawdown is measured from the time a retrenchment begins to when a new high is reached. This method is used because a valley can't be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the smallest trough is recorded.

Drawdowns help determine an investment's financial risk. Both the Calmar and Sterling ratios use this metric to compare a security's possible reward to its risk.

RELATED TERMS
  1. Peak-To-Valley Drawdown

    A fund or money manager's largest cumulative percentage decline ...
  2. Sterling Ratio

    A ratio used mainly in the context of hedge funds. This risk-reward ...
  3. Calmar Ratio

    A comparison of the average annual compounded rate of return ...
  4. Peak

    The highest point between the end of an economic expansion and ...
  5. Risk

    The chance that an investment's actual return will be different ...
  6. Trough

    The stage of the economy's business cycle that marks the end ...
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