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DOWNSIDE DEVIATION
It can be defined as a value representing the potential loss that may arise from risk as measured against a minimum acceptable return. This is done by isolating the negative portion of the volatility. It is thus similar to standard deviation, but it only considers the returns that fall below the minimum acceptable return and this is mainly used in the calculation of the Sortino ratio.
It looks at variation around an average return and so it focuses only on those returns which fall below the minimum acceptable return that is MAR. The calculation will help to identify and steer clear of investments that are unlikely to meet these expectations as this risk measure is expressed as a percentage.
Downside Deviation Homework Help
It reveals the extent to which an investment’s historical returns were lower than the minimum acceptable return that is MAR. A lower percentage suggests less risk of losing money and an investment with a high downside deviation has a habit of cranking out poor returns.
It is most widely used as a measure of investment risk which has some limitations such as the fact that it treats all deviations from the average whether it is positive or negative or the same. However, investors are generally more concerned with negative divergences than positive ones that are the downside risk is a bigger concern and so it is used to resolve this issue by focusing only on downside risk.
Another advantage over standard deviation is that this can also be tailored to the specific objectives as well as to risk profile of different investors who have various levels of minimum acceptable return. This measure is similar to the loss standard deviation except the downside deviation considers only the returns that fall below a defined minimum acceptable return that is MAR rather than the arithmetic mean.
Downside Deviation Assignment Help
For example, if the minimum acceptable return is 6% and the downward deviation is used to measure the variation of each period that falls below 6%. The loss standard deviation would take only the losing periods and it can calculate an average return for the losing periods and it will then measure the variation between each losing return as well as the losing return average.
