Downside Correlation (2024)

FAQs

Downside Correlation? ›

Downside Correlation is the correlation between the investment or portfolio and benchmark when both returns are negative. Relative Correlation is the correlation between the investments' excess returns relative to a common benchmark.

The purchase of a stock, for example, has a finite amount of downside risk bounded by zero. The investor can lose their entire investment, but not more. Unlimited downside risk can exist with a short position in stock through a short sale since the price of the security could continue rising indefinitely.

Specifically, downside risk can be measured either with downside beta or by measuring lower semi-deviation. The statistic below-target semi-deviation or simply target semi-deviation (TSV) has become the industry standard.

For those who don't want to wait, an example of downside protection would be the purchase of a put option for a particular stock, where it is known as a protective put. The put option gives the owner of the option the ability to sell the shares of the underlying stock at a price determined by the put's strike price.

The upside is the potential for an investment to increase in value, as measured in terms of money or percentage. Upside is the opposite of downside, which determines the downward movement of a financial instrument's price.

Downside correlation is defined as the downside covariance divided by the squared root of the product of downside variances.

(daʊnsaɪd ) singular noun. The downside of a situation is the aspect of it which is less positive, pleasant, or useful than its other aspects. The downside of this approach is a lack of clear leadership. Synonyms: drawback, disadvantage, snag, problem More Synonyms of downside.

Downside risk can also be described as a statistical measure that aims to calculate and quantify the worst-case loss that can result from uncertainty in the difference between expected return and realized return in cases where market conditions deteriorate.

In models with downside risk—sometimes called “two-sided risk”—providers are financially responsible for failure to meet cost and quality benchmarks. In downside risk models, risk can be assumed solely by providers or shared between providers and payers.

Diversification is key to managing downside risk. Specific tactics include investing in high-quality bonds, gold and derivatives.

What is the maximum downside risk? ›

In financial investment, the maximum downside exposure (MDE) values the maximum downside to an investment portfolio. In other words, it states the most that the portfolio could lose in the event of a catastrophe.

Downside protection strategies involve adjusting a portfolio's market exposure to limit the impact of potential losses from market downturns. These strategies can be applied to different types of asset market exposures, but are most commonly focused on equity, followed by fixed income.

In a contract that include downside risk, providers can typically earn a reward, usually an agreed-upon percentage of achieved savings (managing the medical expense of the relevant population so that it comes in lower than an agreed-upon target value), but must pay a share of the added costs if actual costs are higher ...

A Fund Manager who has a capture ratio less than 100 has outperformed the index during the down-market by falling less than the index. For instance, a ratio of 75 indicates that the portfolio declined only 75% as much as the index during the period under consideration.

A 90% Downside Day, which occurs quickly after a market high, is most commonly associated with a short-term market correction, although there are some notable exceptions in the record.

The upside/downside ratio is calculated by dividing the average return of up periods (periods when the price of an asset increases) by the average return of down periods (periods when the price of an asset decreases).

Common examples of negative risks include:

experimenting with alcohol and other drugs. having unprotected sex. skipping school. getting a lift with someone who has been drinking.

Downside risk is the potential for your investments to lose value in the short term. History shows that stock and bond markets generate positive results over time, but certain events can cause markets or specific investments you hold to drop in value.

Downside Risk: uncertainty associated with potential financial losses; a risk arrangement that includes both upside and downside risk may be referred to as a “two-sided risk arrangement.”