Risk Analysis | Calculate Maximum Drawdown with Diversiview

A maximum drawdown (MDD) measures the maximum fall in the value of the investment, as given by the difference between the value of the lowest trough and that of the highest peak before the trough. The MDD Period of Recovery (or Recovery Time) measures how many calendar days after the lowest trough the investment took to climb back up to the value of the previous highest peak.

See a visual definition below, and check out the two examples later on the page.

A visual explanation of the Maximum DrawDown (MDD) measuring the maximum fall in value of an investment. Image copyright of the Corporate Finance Institute. — Image copyright of the Corporate Finance Institute

MDD is calculated over a long time period when the value of an asset or an investment has gone through several boom-bust cycles. In Diversiview we calculate MDD over the past 3 years, in line with the investment expected return (historical) and investment risk (volatility) that are calculated over the same period of time.

Where to find MDD (Maximum Drawdown) for a Portfolio in Diversiview

STEP 1

Go to your Diversiview account Dashboard, scroll down to the history of analyses section and find the portfolio analysis you want to explore. Click on “View Analysis”. See an example below.

The history of analyses section in a demo account dashboard from Diversiview portfolio analysis software — Example analyses history in a demo account dashboard

STEP 2

Use the Table of Contents navigation, or scroll down to the Asset Allocation – Backtest section.

The Maximum Drawdown (MDD) and the recovery time (MDD-RT) for your portfolio is shown at the left of the backtesting graph. See an example below.

In this example, the start portfolio value was $100,000. The lowest trough was $89,755.04 on 3 November 2022, and the highest peak before that was $113,901.06 on 17 August 2022. This gives a 21.2% Maximum Drawdown for the portfolio.

The portfolio value recovered on 31 March 2023 when its value reached $114,174.76 (the first value after the lowest trough that was at the same level or higher than the value portfolio started to fall in August 2022). This means a recovery time of 148 days.

An example asset allocation backtest in Diversiview, portfolio optimisation software, together with the Maximum Drawdown (MDD) and recovery time (MDD-RT). — Example MDD and MDD-RT for a portfolio in Diversiview

NOTE: As data is continually added, the 3 years window changes and the MDD (Maximum Drawdown) and MDD-RT (Maximum Drawdown Recovery Time) will change as well, to reflect the latest situation.