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You are analyzing an investment opportunity and collecting three returns from the past 3 years: 0.34%,...

You are analyzing an investment opportunity and collecting three returns from the past 3 years: 0.34%, 18.64%, -3.14%. Risk free rate is 0.8% (=0.0080). What is the downside risk?

Please round your answer to the fourth decimal. For example, 0.1234.

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Answer #1

Computation of Downside Risk

We have given the returns for the past three years for an investment as:

0.34% , 18.64% , -3.14%

Also, we have been given the Risk Free Rate as 0.8%

Thus, In order to calculate the downside risk, we have to consider the returns which are below the risk free rate of 0.8% ie.: 0.34%, -3.14%

We will calculate the standard deviation of the 0.34% & -3.14%

Downside risk is +2.46%

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