InfoIn investing, upside risk is the uncertain possibility of gain.more...Upside risk is calculated using data only from days when the benchmark (for example S&P 500 Index) has gone up. Upside risk focuses on uncertain positive returns rather than negative returns. For this reason, upside risk is not a "risk" at all in the sense of a possibility of adverse outcomes. It is actually beneficial to investors, because it represents the element of beta that investors profit from. Therefore, higher upside risk is better than lower, and upside risk is preferable to downside risk.

An alternative measure of upside risk is the upper semi-deviation.Upside risk is calculated using data only from days when the benchmark (for example S&P 500 Index) has gone up.…

Then, in early 1980s, when Dr. Frank Sortino developed formal definition of downside risk as a better measure of investment risk than standard deviation, downside risk has become the industry standard for risk management.It is important to distinguish between downside and upside risk because security distributions are non-normal and non-symmetrical.This is in contrast to what the capital asset pricing model (CAPM) assumes: that security distributions are symmetrical, and thus that downside and upside betas for an asset are the same.…

Moreover, Fama and French (1992) demonstrated that beta is an imperfect measure of investment risk.The dual-beta model allows investors to differentiate downside risk - risk of loss - from upside risk, or gain.Regular beta fails to acknowledge, and thus to permit, this distinction.…

The dual-beta model is particularly useful because CAPM beta "consistently lags the dual-betas, in terms of average daily returns and return-to-standard deviation ratio."Thus, investors can use the dual-beta approach to minimize their downside risk and maximize their upside risk/gain which cannot be achieved through the use of standard beta and the standard CAPM.While the dual-beta model has many benefits in terms of accuracy and usefulness, it might not be cost-effective for individual investors and is more suitable for financial planners due to transaction costs.…

The CAPM, however, includes both halves of a distribution in its calculation of risk.That is why it is crucial to not simply rely upon the CAPM, but rather to distinguish between the downside risk, which is the risk of losses, and upside risk, or gain.Studies indicate that "around two-thirds of the time standard beta would under-estimate the downside risk."…

Therefore, higher upside risk is better than lower, and upside risk is preferable to downside risk.Looking at upside risk and downside risk separately provides much more useful information to investors than does only looking at the single Capital Asset Pricing Model (CAPM) beta.The comparison of upside to downside risk is necessary because "modern portfolio theory measures risk in terms of standard deviation of asset returns, which treats both positive and negative deviations from expected returns as risk."…