why would we have running_max[running _max <1]=1 when in actual cases portfolio can actually go below the initial investment
Hi Jagteshwar,
In most practical scenarios, maximum drawdown is defined as the decline from the highest peak value of cumulative returns to the lowest point before a new peak is reached. The line running_max[running_max < 1] = 1 is a way to make sure that early drawdown calculations do not imply misleading results when cumulative returns haven't yet reached above the baseline value. It simplifies the interpretation by assuming that drawdowns are calculated from the perspective of the initial investment (normalized to 1).
Hope this helps.
Thanks for the explaination!