Risk
Downside deviation
Volatility calculated using only the returns below a threshold, ignoring upside moves.
How it works
Standard deviation penalises large gains as much as large losses. Downside deviation counts only the outcomes an investor actually minds, usually those below zero or below a minimum acceptable return.
It is the denominator of the Sortino ratio, which is the risk-adjusted return measure for people who object to being charged for their upside.
Related terms
- VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
- Sortino ratioLike the Sharpe ratio, but dividing only by downside volatility rather than all volatility.
- Standard deviationA statistical measure of how far values typically sit from their average.
- SkewnessWhether a return distribution leans towards large gains or large losses.
More in Risk
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.