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.

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RELATED TERMS
  1. Peak-To-Valley Drawdown

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

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  3. Peak

    The highest point between the end of an economic expansion and ...
  4. Calmar Ratio

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  5. Trough

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RELATED FAQS
  1. What is the difference between a drawdown in banking and a drawdown in trading?

    The term "drawdown" appears in both the banking world and in the arena of trading, but it has completely different meanings ... Read Full Answer >>
  2. What is the difference between a drawdown magnitude and drawdown duration?

    Drawdown magnitude refers to an amount of money, while drawdown duration is in reference to a period of time. Drawdown is ... Read Full Answer >>
  3. How do drawdowns help assess investment risk?

    Drawdowns determine how much risk is associated with a certain asset or investment. Drawdowns are essentially a measure of ... Read Full Answer >>
  4. What trading strategies help investors withstand a drawdown?

    Two primary trading strategies to help a trader withstand a drawdown are hedging and following simple money management rules. Drawdown, ... Read Full Answer >>
  5. What are the main disadvantages of a self-directed IRA?

    The main disadvantage of a self-directed Individual Retirement Account is that it may expose the investor to more risk than ... Read Full Answer >>
  6. How does beta measure a stock's market risk?

    Beta is a statistical measure of the volatility of a stock versus the overall market. It's generally used as both a measure ... Read Full Answer >>
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