Downside Deviation

What is 'Downside Deviation'

Downside deviation is a measure of downside risk that focuses on returns that fall below a minimum threshold or minimum acceptable return (MAR). It is used in the calculation of a risk measure known as the Sortino Ratio.

BREAKING DOWN 'Downside Deviation'

Standard deviation, the most widely used measure of investment risk, has some limitations, such as the fact that it treats all deviations from the average - whether positive or negative - as the same. However, investors are generally more concerned with negative divergences than positive ones, i.e. downside risk is a bigger concern. Downside deviation resolves this issue by focusing only on downside risk.


Another advantage over standard deviation is that downside deviation can also be tailored to the specific objectives and risk profile of different investors who have various levels of minimum acceptable return.

RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Residual Standard Deviation

    A statistical term used to describe the standard deviation of ...
  3. Standard Deviation

    1. A measure of the dispersion of a set of data from its mean. ...
  4. Risk

    The chance that an investment's actual return will be different ...
  5. Empirical Rule

    A statistical rule stating that for a normal distribution, almost ...
  6. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, ...
Related Articles
  1. Managing Wealth

    Mitigating Downside With The Sortino Ratio

    Differentiate between good and bad volatility with the Sortino Ratio.
  2. Investing

    What is the Sortino Ratio?

    By using the Sortino ratio, an investor can focus on the rate of return needed to reach a specific financial goal, such as saving for vacation or making a down payment on a home. It looks at ...
  3. Managing Wealth

    The Uses And Limits Of Volatility

    Check out how the assumptions of theoretical risk models compare to actual market performance.
  4. Trading

    5 Ways To Rate Your Portfolio Manager

    Investopedia explains: These five performance ratios will help you measure how good your money manager is at increasing the value of your portfolio.
  5. Markets

    Explaining the Empirical Rule

    The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution.
  6. Markets

    3 Ways To Evaluate the Performance of Alternatives

    Learn about three ways to measure the performance of alternative investments. See how the commonly used Sharpe ratio has drawbacks in measuring volatility.
  7. Trading

    A Simplified Approach To Calculating Volatility

    Though most investors use standard deviation to determine volatility, there's an easier and more accurate way of doing it.
  8. Managing Wealth

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
  9. ETFs & Mutual Funds

    5 Ways To Measure Mutual Fund Risk

    These statistical measurements highlight how to mitigate risk and increase rewards.
  10. Trading

    Improve Your Investing With Excel

    Excel is a useful tool to assist with investment organization and evaluation. Find out how to use it.
RELATED FAQS
  1. What does standard deviation measure in a portfolio?

    Dig deeper into the investment uses of, and mathematical principles behind, standard deviation as a measurement of portfolio ... Read Answer >>
  2. What is the difference between standard deviation and average deviation?

    Understand the basics of standard deviation and average deviation, including how each is calculated and why standard deviation ... Read Answer >>
  3. How is risk aversion measured in Modern Portfolio Theory (MPT)?

    Find out how risk aversion is measured in modern portfolio theory (MPT), how it is reflected in the market and how MPT treats ... Read Answer >>
  4. How is standard deviation used to determine risk?

    Understand the basics of calculation and interpretation of standard deviation and how it is used to measure risk in the investment ... Read Answer >>
  5. What is standard deviation used for in mutual funds?

    See how standard deviation is helpful in evaluating a mutual fund's performance. Use it in combination with other measurements ... Read Answer >>
  6. What is the difference between the expected return and the standard deviation of ...

    Learn about the expected return and standard deviation and the difference between the expected return and standard deviation ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center