Downside Deviation

AAA

DEFINITION of 'Downside Deviation'

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.

INVESTOPEDIA EXPLAINS '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. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  3. Variance

    The spread between numbers in a data set, measuring Variance ...
  4. Standard Deviation

    1. A measure of the dispersion of a set of data from its mean. ...
  5. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  6. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
Related Articles
  1. Active Trading Fundamentals

    Measuring And Managing Investment Risk

    Risk is inseparable from return. Learn more about these measures and how to balance them.
  2. Mutual Funds & ETFs

    Understanding Volatility Measurements

    How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more!
  3. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  4. Investing

    How to Use Stratified Random Sampling

    Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ...
  5. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
  6. Fundamental Analysis

    Lognormal and Normal Distribution

    When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.
  7. Investing Basics

    How Does Goodwill Affect Financial Statements?

    Goodwill is a bit of a paradox--intangible, yet it is recorded as an asset on the purchasing company's balance sheet.
  8. Investing Basics

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
  9. Technical Indicators

    The Normal Distribution Table, Explained

    The normal distribution formula is based on two simple parameters - mean and standard deviation
  10. Economics

    Can Investors Trust Official Statistics?

    The official statistics in some countries need to be taken with a grain of salt. Find out why you should be skeptical.

You May Also Like

Hot Definitions
  1. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  2. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  5. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  6. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
Trading Center