Maximum Drawdown is a crucial metric that helps investors assess the downside risk of an investment or portfolio . It measures the largest peak-to-trough decline in value experienced during a specific period. For example, if an investment reaches a peak value of $10,000 and subsequently declines to a low of $7,000, the maximum drawdown would be $3,000 or 30%. Maximum Drawdown provides insights into the potential loss an investment can endure. A lower maximum drawdown indicates more stable performance and potentially lower risk. Investors use this metric to evaluate an investment's risk tolerance and determine if the potential losses align with their risk appetite. It's important to note that recovering from a significant drawdown can require substantial gains. For instance, if an investment experiences a 50% drawdown, it would need to appreciate by 100% to regain its original value. Considering maximum drawdown alongside other risk measures, such as the Sharpe Ratio, provides a more comprehensive understanding of an investment's risk profile.
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