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Downside risk

Downside Risk

Downside risk refers to the potential for loss in the value of an investment, specifically focusing on the likelihood of negative returns. It measures the risk of an investment performing worse than expected and incurring financial losses. Investors often use downside risk to assess the potential harm during market downturns, ensuring they are aware of worst-case scenarios. Unlike traditional risk measures, which consider both upside and downside potential, downside risk only looks at negative outcomes, making it particularly useful for risk-averse investors.

Example

An investor might analyze the downside risk of a stock to determine how much it could lose during a recession or market crash.

Key points

• Focuses on the likelihood of negative returns.

• Measures potential losses in an investment.

• Important for understanding worst-case scenarios.

Quick Answers to Curious Questions

What does downside risk assess?

Downside risk assesses the potential for an investment to lose value, focusing on negative returns.

Why is downside risk important?

It helps investors understand the potential losses they could face in a market downturn.

How is downside risk different from regular risk?

Regular risk measures both upside and downside potential, while downside risk only focuses on negative outcomes.

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