Downside Deviation
Definition
A risk measure that calculates standard deviation using only returns that fall below a target rate, ignoring upside volatility.
Explanation
Downside deviation addresses a key flaw in standard deviation: investors don't dislike upside volatility. A stock that returns +5%, +15%, +3%, +20% has high standard deviation but only from positive outcomes. Downside deviation would report low risk for this stock. The Sortino Ratio uses downside deviation instead of standard deviation, providing a more investor-relevant risk-adjusted return metric. Stoquity calculates both standard deviation and downside deviation for all portfolios.
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