What is the upside potential ratio?

Upside potential ratio is a measure of an investment’s return in relation to how much risk is involved in producing that return. The higher the upside potential ratio, the better the asset’s performance is predicted to be.

Where have you heard about the upside potential ratio?

In investing, the upside potential ratio is often used to assess a portfolio with derivatives, such as options, whose value is dependent on an underlying asset.

What you need to know about the upside potential ratio.

The measurement enables you to choose investments that have had a relatively good upside performance, per unit of downside risk.

In practice, standard deviation is often used to measure risk. However, it treats deviations above the mean, or normal return level, the same as deviations below it. Investors, of course, prefer good returns (deviations above the mean).

Upside potential ratio can be used as an alternative to the Sharpe ratio, one of the most popular measures of risk-adjusted rewards. Unlike Sharpe though, it doesn’t measure risk using volatility.

Find out more about the upside potential ratio.

Read our definitions of standard deviation and Sharpe ratio.