Business, Legal & Accounting Glossary
The likelihood that a security or other investment will decline in price, or the amount of loss that could result from that potential decline.
Downside risk includes both the likelihood and extent to which a stock’s price may decline. Analysts use various measures to assess the downside risk of a stock. For example, stocks that are selling at the low end of their historical price-earnings ratio would appear to have relatively limited downside risk, because investors will perceive the stock as offering good long-term value. Also, stocks whose dividend yield is both high and safe would also have seemingly little downside risk, because investors should continue to buy the stock at that price for the cash return. On the other hand, stocks with historically high P/Es may have relatively high downside risk, because they may appear overvalued. For conservative investors, limited downside risk may be key. But for investors who seek to maximize their returns, limited downside risk is just one factor to be considered in buying an equity. While limited downside risk is a positive, it comes at a price: Not surprisingly, it is often those stocks that have the least downside risk that also has the least potential for price appreciation.
You need to always know what the downside risk might be and do your best to avoid reaching it if you can.
My policy is to put trailing sell orders on the stocks within my portfolio to limit the downside risk and protect profits earned to date.
There was some slight downside risk, but on the whole the play seemed like a solid one, so we went ahead and pulled the trigger on the deal.
equity collar
calmar ratio
upside potential
2% rule
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This glossary post was last updated: 30th October, 2021 | 0 Views.