Back to path GUIDEBOOKDrawdowns
UNIT 2

Volatility & Drawdowns

Volatility measures dispersion; drawdown measures lived loss from a prior peak.

Peak to trough−38%Pain + recovery
What it tells you

How rough the path was and how hard recovery became.

When it is useful
  • Sizing strategies
  • Setting realistic expectations
When it fails
  • Past volatility misses new risks
  • Max drawdown is sample-dependent
COMMON MISTAKE

Comparing two strategies only by ending return.

Evidence note

Investor behavior and withdrawals make path risk economically important, not merely emotional.

60-SECOND CHEAT SHEET

Remember this.

  1. 1Drawdown = peak-to-trough
  2. 2Recovery is asymmetric
  3. 3Path affects behavior
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