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CFA Level I · CFA Level I Exam · Statistical Characteristics of Asset Returns

An investment has a mean annual return of 9% and a standard deviation of 12%. A minimum acceptable return of 3% is set as the target. The target semideviation is most likely to be:

Target semideviation uses only observations below the chosen target, measuring deviations from that target. It therefore captures downside risk specifically. It does not use all observations like the standard deviation does, so it is generally not equal to the standard deviation.

  1. Asmaller than the standard deviation only if returns are symmetric about the mean
  2. Bcalculated using only observations below the target and so measures downside riskCorrect
  3. Ccalculated using all observations and so equals the standard deviation

Explanation

Target semideviation includes only observations at or below the target, with deviations measured from the target rather than the mean. It therefore captures downside risk. It does not use all observations, and it is not tied to the symmetry condition stated in the first option.

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