Downside Risk

- The potential loss in value of an investment in a worst-case scenario, often used to assess risk-adjusted returns.

Scenario:

A pension fund considers investing in a private infrastructure project. The team models downside risk scenarios, including regulatory changes and demand shocks.

Why This Matters:

Protects against capital loss, informs portfolio construction, supports prudent risk management, meets fiduciary duty.

The Process:

Risk teams use scenario analysis, stress testing, and sensitivity analysis to quantify potential losses.