Return and Drawdown

What this unit covers

Learn to calculate total return and maximum drawdown for a real portfolio, and see how a strong total return can still hide a severe drawdown along the way.

By the end you will be able to

• Calculate total return from a portfolio's starting and ending value.
• Calculate maximum drawdown from a portfolio's peak and trough.
• Explain why a strong total return can still hide a severe drawdown.

How it starts: Same Ending Number

1. Two account statements each show a return of 30 percent this year.
2. One portfolio climbed steadily, the other fell hard before it recovered.
3. Were these two rides the same to actually sit through?

Words you will meet

Maximum Drawdown

The largest percentage fall from a peak value to the lowest point that follows it.

Total Return

The percentage change from a starting value to an ending value over a period.

Peak

The highest value a portfolio reaches during the period being measured.

Trough

The lowest value a portfolio reaches after a peak, before it recovers.

In this module: Portfolio Analytics

1. Return and Drawdown (this unit)
2. Correlation and Concentration
3. Risk-Adjusted Performance
4. Portfolio Review