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What is downside beta?

Downside beta

This is a way to measure downside risk in a beta calculation. Investors may try to construct their portfolios by minimising downside beta, which can help them maintain value in times of market decline.

Where have you heard about downside beta?

You might have heard of it as an alternative to traditional beta, a measure of the volatility of an investment in relation to the market as a whole. Downside beta is an element of beta measuring downside risk, the risk associated with loss.

What you need to know about downside beta.

Beta is used as part of the capital asset pricing model or CAPM, which is designed to calculate the expected return of an asset. While downside beta measures downside risk, or the possibility of negative movement, CAPM can also be modified to include upside beta. Both upside and downside beta are defined as the scaled amount by which an asset moves compared to a benchmark. Downside risk is calculated on days when the benchmark's return is negative, while upside beta is calculated when it is positive.

Find out more about downside beta.

Beta represents how a security's responds to market swings. Check out our guide to find out more.

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