What is Downside Deviation?
Downside deviation measures only the returns that fall below a target, such as 0% or the risk-free rate. Returns at or above the target count as zero, the shortfalls are squared and averaged, and the square root is taken. It is the risk measure in the Sortino ratio.
Why Downside Deviation matters
It separates painful swings from welcome ones, which standard deviation lumps together.