Drawdown & Maximum Drawdown

Drawdown & Maximum Drawdown

A drawdown measures the decline from a historical peak to a current value. It answers: "how far have we fallen from the highest point seen so far?"

For each price $P_i$, the drawdown is: $DD_i = \frac{P_i - \text{Peak}_i}{\text{Peak}_i}$

where $\text{Peak}_i = \max(P_0, P_1, ..., P_i)$ is the running maximum.

Drawdowns are always $\leq 0$: zero when at a new high, negative otherwise.

Maximum Drawdown (MDD) is the worst (most negative) drawdown over the entire period: $MDD = \min_i DD_i$

MDD is a critical risk metric used to evaluate investment strategies. A strategy with a 50% MDD means an investor could have lost half their capital at the worst point.

Your Task

Implement:

• drawdown(prices) — list of drawdowns from running peak
• max_drawdown(prices) — minimum drawdown value (most negative)