Maximum drawdown
The maximum loss from a market peak to a market nadir, commonly called the maximum drawdown (MDD), measures how sustained one’s losses can be. Malik Magdon-Ismail and Amir Atiya present analytical results relating the MDD to the mean return and the Sharpe ratio. The MDD factors into many risk-adjusted measures of performance, such as the Calmar ratio. Magdon-Ismail and Atiya propose new scaling laws for such ratios, analogous to the ‘square-root-T scaling law’ for the Sharpe ratio, which facilitates the comparison of funds with track records of different length. They also discuss the portfolio implications of their results
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