Downside Deviation

(MAR = const)

Here, MAR stands for “minimal acceptable return.” To calculate this, we first determine the sum of the squared distances between the returns and the MAR constant, where the sum is restricted to those returns that are less than the MAR. This sum is then divided by n, and the square root of the result is taken:



where:

    c = MAR
    n = total number of returns

    This result is annualized in the same way as standard deviation.

(MAR = cash)

This is very similar to the downside deviation with constant MAR. The only difference is that the constant in the formula is replaced by the cash return series.

To view our quick tip video on Downside Deviation, click the following link: http://www.styleadvisor.com/sites/default/files/quick_tip_video/downside_deviation_wmv_15827.wmv.

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