What is maximum drawdown?

What is maximum drawdown?

Approach: Define as largest peak-to-trough decline.

Maximum observed loss from a peak to a trough before new peak is achieved. For series P_t, MDD = max_{i<j} (P_i - P_j)/P_i.

Follow-up: How to calculate it efficiently?

Key concepts: peak-to-trough, risk metric, historical simulation.