Drawdown - Financial definition
Concise definition of the term drawdown
In finance, drawdown refers to the decline in the value of an investment or portfolio from its peak to its trough, measured in percentage terms.
Comprehensive definition of the term drawdown
A drawdown is a critical metric used in risk management to assess the potential loss an investment or trading strategy might experience over a specific period. It provides insight into the volatility and downside risk by quantifying the extent of an investment's peak-to-trough decline before it recovers back to the peak level. For example, if a portfolio's value drops from $100,000 to $70,000, the drawdown is 30%. Investors and fund managers use drawdown analysis to evaluate the performance and risk profile of investment strategies, ensuring they align with their risk tolerance and investment goals.