A drawdown is the decline in the value of an investment from a previous peak to a lower point. It shows how much a portfolio or share has fallen after a rise. A drawdown is usually expressed as a percentage.
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A drawdown measures how large a temporary loss is from the highest point.
When an investment first rises and then falls, the difference between the highest value and the lowest value is called the drawdown. This provides insight into the risk and fluctuations of an investment. The larger the drawdown, the stronger the decline has been. Investors use drawdown to assess how sensitive a strategy or portfolio is to significant setbacks.
Short example:
Suppose your portfolio rises from €10,000 to €12,000. It then falls to €9,000. The difference between the peak of €12,000 and the lowest point of €9,000 is €3,000.
€3,000 divided by €12,000 is 25%. The drawdown therefore amounts to 25%.
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