Which statement best describes downside standard deviation?

Downside standard deviation specifically quantifies the variability of returns that are below a defined target or threshold, typically the mean return. This measure focuses on the negative aspects of return distribution, helping investors understand how much returns can deviate negatively from expected performance. Unlike standard deviation, which considers variability on both sides of the mean (positive and negative), downside standard deviation solely accounts for the downside risks, making it particularly valuable for risk-averse investors.

This characteristic is crucial because it allows investors to identify potential losses rather than just overall volatility, which might include both gains and losses. Recognizing the downside risks helps in constructing portfolios that align better with individual risk tolerances and investment goals. Thus, it is an important tool for understanding risk in portfolio management.