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Downside

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In business jargon, downside is the risk of unfavorable outcome to a particular activity. In an investment context, downside is generally understood to be the risk of price of decline, sometimes called downside risk. Sophisticated means of quantifying the downside to an investment portfolio have been constructed. For instance Value at Risk methodologies (VaR) compute a number that expresses the maximum amount a portfolio is likely to fall (a measure of downside) in a given period, subject to a certain confidence interval. Downside protection is the name given to any strategy for limiting the magnitude of downside. Having what is called a protective put on an owned stock is the classic example of downside protection. With a protective put, the shares can always be sold for at least the strike price of the put by exercising the option if the share price falls below the stroke price before the put's expiration date.



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