In investing,
upside risk is the uncertain possibility of gain. It is measured by
upside beta. An alternative measure of upside risk is the upper semi-deviation. Upside risk is calculated using data only from days when the benchmark (for example S&P 500 Index) has gone up.
Upside risk focuses on uncertain positive returns rather than negative returns. For this reason, upside risk, while a measure of unpredictability of the extent of gains, is not a “
Financial risk” in the sense of a
Risk.
Upside risk vs. Capital Asset Pricing Model
Looking at upside risk and
downside risk separately provides much more useful information to investors than does only looking at the single Capital Asset Pricing Model (CAPM) beta. The comparison of upside to downside risk is necessary because “modern portfolio theory measures
Financial risk in terms of standard deviation of asset returns, which treats both positive and negative deviations from
as risk.”
In other words, regular beta measures both upside and downside risk. This is a major distinction that the CAPM fails to take into account, because the model assumes that
upside beta and
downside beta are the same. In reality, they are seldom the same, and making the distinction between upside and downside risk is necessary and important.
See also
External links
