Semi Variance

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Semi-variance provides a good measure of downside volatility for a equity or a portfolio. It is similar to Variance, but it only looks at periods where the returns are less than the target or average level.

Semi Variance 
 = 
SUM(RET DEV)2 
N(ZERO) 

Semi-variance is the square of semi-deviation. Semi-variance is calculated by averaging the deviations of returns that have a result that is less than the mean.

Semi Variance In A Nutshell

If you are familiar with variance by itself, then just think of all the variance that is below the mean. Looking to the upside and calculating upside potential, this will provide little to no value. With that being said, many people try to measure risk and how much they can stomach for a given position or portfolio.

Semi Variance is taking the data that you generate that is below the mean and mapping its locations. Why might you need to know the data below the mean, well it can help to limit risk to the downside and gauge how much risk you want to take in a particular investment.

Closer Look at Semi Variance

A popular data point that many use is standard deviation, but that does not take into account the same information semi variance does. This is strictly for downside observations. The goal is to limit the size of semi variance because you want returns with as little risk as possible.

That is about the just of semi variance, so now it is on yourself to asses you current holdings and portfolios and use semi variance to determine how much risk is good for you. Of course you need to focus on the downside and the risks, but be sure to have a target in mind where you may take a little profit off the table. There is a healthy balance between the two sides of the equation and you have to find the happy medium for yourself.

If you want to take a peek at similar tools, look at variance, standard deviation, and few others as this can help to give you a nice well rounded picture of the landscape. Join an investment community as you can bounce your ideas off of the people and get real time feedback. Also, if you consult an investing professional, they should be able to help you and point you in the right direction. Remember, the goal is get the highest returns for least amount of risk and semi variance will help to determine the potential downside risks.