Downside Risk
The dispersion of returns below a target level, ignoring variation above it.
Formula
Downside Deviation = square root of the average of squared shortfalls below the target return
Unit
%
In depth
Downside risk corrects the main conceptual flaw in standard deviation, which treats an unexpectedly good year as risk. It is the denominator of the Sortino ratio and is the more intuitive measure for anyone who thinks of risk as losing money rather than as variability. Its drawback is that it uses only part of the data, so it needs more observations to estimate reliably, and it depends on the target chosen. For symmetric return distributions it conveys much the same information as standard deviation; for asymmetric ones it says something genuinely different.
Worked example
Returns of 12%, -8%, 15%, 4% and -3% against a zero target have shortfalls of 8 and 3. Downside deviation is the square root of (64 + 9) / 5 = the square root of 14.6 = 3.8%, against a full standard deviation of 8.7%.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Downside Risk” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.