Downside Deviation

Downside deviation matters when asymmetric risk weighs more than symmetric volatility. Standard deviation treats a gain and a loss of the same size identically; downside deviation counts only returns below a minimum acceptable return (MAR), which lines up with how investors actually feel about losses. It is the building block in the denominator of the Sortino Ratio.

The MAR you choose changes the result. Setting it to zero counts any losing period; setting it to the risk-free rate counts any period that underperformed cash. Always report the threshold, since a downside deviation is meaningless without it.