Downside risk

Downside risk in financial terms is the chance of an unexpected and undesirable event occurring that will impair the value of an investment.

As far as possible, investors will clearly wish to avoid any risk that is not offset by a reward in the form of extra return.

It is important to note that volatility is not the same as downside risk. Volatility in the financial markets is the degree of fluctuation in the price of a stock or financial product such as a stock index or a currency. As price fluctuations can be either downward or upward movements, volatility also includes upside risk.