The Journal of Portfolio Management · 1996 · 143 citations · 0 references
ManagementFinanceRisk ManagementFinancial EconomicsFinancial Risk ManagementRisk AssessmentFinancial RiskPortfolio Risk ManagementRisk CharacterizationRisk EvaluationRisk MeasurementRisk ModelingDownside Risk AnalysisDownside Risk ManagementDownside Risk MeasurementDownside Risk Portfolio SelectionPortfolio ControlRisk Thresholds
Downside risk was first introduced by Sortino and Hopelain in 1980, initially lacking investment applications, but has since gained traction, with Balzer and Harlow exploring its conceptualization and emphasizing deviations below a threshold to avoid adverse outcomes. The authors aim to support the growing use of downside risk while highlighting critical problems in estimating and calculating downside deviation for asset allocation and performance measurement. The article focuses on the challenges of estimating and calculating downside deviation, treating downside risk as synonymous with downside deviation throughout. Reference 94132.
94132). W hen the first article on downside risk , was published (see Sortino and ' ' Hopelain [1980]), there were no applications of downside risk in the investment community. .Now, agrowing number of practitioners are using downside risk in various portfolio managementapplications. ..We want to ,support this movement, but we would like to call attention to some critical problems that we find in our continued research on the subject. Balzer [1994] and Harlow [1991] have examined various ways to conceptualize 'downside risk. Both conclude that deviations below some set value that must be ,'. . earned at a minimumIn order to prevent bad outcomes are preferred to.downside probability or shortfall risk. We concur with this finding and will focus here on the problems atteA4an~ to estimating and calculating downside deviation'(DD)':m: asset allocation and performance measurement applic~tions. For the remainder of the article, downsiderisk Will be synonymous with DO.