Maximum Drawdown
The largest peak-to-trough loss before recovery — the worst realized loss.
Maximum drawdown (MDD) measures pain: the biggest percentage drop from a portfolio's peak to its lowest point before recovering to a new high. A 30% MDD means at some point, your portfolio fell 30% from its peak. Unlike volatility (which treats upside and downside symmetrically), MDD captures the actual loss experience investors endure. For example, the S&P 500's MDD in 2008 was ~57% (peak Oct 2007 to trough Mar 2009). Recovery time matters: that drawdown took 4+ years to recover. Behavioral research shows MDD drives redemptions more than volatility — a 20% MDD feels worse than 15% annualized vol. Hedge funds and alternatives often target low MDD (10-15%) to keep clients invested through downturns.
Calmar Ratio
Annualized return divided by maximum drawdown.
Value at Risk (VaR)
The maximum expected loss at a given confidence level — but doesn't tell you how bad the tail is.
Portfolio Volatility
Standard deviation of portfolio returns — total risk including diversification effects.
Efficient Frontier
The set of portfolios offering the highest return for each level of risk.
Sharpe Ratio
Risk-adjusted return: excess return divided by volatility.
Covariance Matrix
Captures how asset returns move together — the foundation of diversification.