In investing, downside beta is the element of beta that investors associate with risk in the sense of the uncertain potential for loss. It is defined to be the scaled amount by which an asset tends to move compared to a benchmark, calculated only on days when the benchmark’s return is negative.
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Formula
Downside beta measures downside risk. The Capital asset pricing model (CAPM) can be modified to use semi-variance instead of standard deviation to measure risk.
Denoting
while upside beta is given by this expression with the direction of the inequalities reversed. Therefore,
Downside beta vs. beta
Downside beta has greater explanatory power than standard beta in bearish markets. Portfolios that are constructed by minimizing downside beta may be able to maintain more of their value during times of market decline.