This measure is similar to the loss standard deviation except the downside deviation considers only returns that fall below a defined minimum acceptable return (MAR) rather than the arithmetic mean. For example, if the MAR is 6%, the downside deviation would measure the variation of each period that falls below 6%. (The loss standard deviation, on the other hand, would take only losing periods, calculate an average return for the losing periods, and then measure the variation between each losing return and the losing return average).
Investors who are required to select and monitor investment managers should develop a basic understanding of investment statistics. Quantitative tools can provide you with good insight that you can use in your qualitative interviews with managers and when monitoring your investments.