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

An investor has a minimum acceptable return of 5%. A portfolio manager reports that two portfolios have equal standard deviations, but Portfolio P has a return distribution with a long left tail while Portfolio Q is symmetric. Which measure is most appropriate for capturing the investor's concern about returns below 5%?

Target semideviation is most appropriate. It measures dispersion only of returns below a chosen target, here 5%, so it captures downside risk and the left-tail difference between the portfolios. Range and mean absolute deviation treat deviations above and below the mean the same way.

  1. ATarget semideviationCorrect
  2. BRange of returns
  3. CMean absolute deviation

Explanation

Target semideviation uses only deviations below the target, so it captures downside risk relative to the 5% threshold. Range and mean absolute deviation treat upside and downside deviations alike and ignore the target.

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