Downside Risk
Downside risk refers to the potential loss an investment may face if its value decreases. It is a measure of the likelihood and extent of negative returns, helping investors understand the worst-case scenarios for their investments. This concept is crucial for assessing the overall risk associated with different assets, such as stocks or bonds.
Investors often use downside risk to make informed decisions about their portfolios. By analyzing downside risk, they can determine how much risk they are willing to accept and adjust their investment strategies accordingly. Tools like Value at Risk (VaR) can help quantify this risk, providing insights into potential losses.