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CFA Level I · CFA Level I Exam · Introduction to Risk Management

Which risk metric is most appropriate for an investor who wants to measure only the shortfall of returns below a minimum acceptable return?

Target downside deviation is most appropriate because it measures only returns falling below a chosen minimum acceptable return. Standard deviation includes upside variation, and beta captures market sensitivity, so neither isolates shortfall relative to a target.

  1. AStandard deviation
  2. BBeta
  3. CTarget downside deviationCorrect

Explanation

Target downside deviation counts only returns below the specified minimum target. Standard deviation treats upside and downside deviations alike, and beta measures sensitivity to market movements rather than shortfall from a target.

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