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A Yardstick for Downside Risk

By Numer de Guia Note: The Stock Screens column will not be published on July 4. It will return on July 11.

One of the most commonly used measures of a security's risk level is

standard deviation -- a statistical gauge of the degree to which a stock's returns over the course of a defined period vary from its average return for the period. The greater the degree of variability, the greater the standard deviation -- and the higher the level of risk the investor takes on to realize the return.

Some investors say standard deviation is a misleading measure of risk because it doesn't distinguish between upside and downside uncertainty. Therefore, another measure -- downside deviation -- has found favor in financial circles. This gauge attempts to isolate the underperformance risk (or "loss" risk, if the target return is zero), because this is the uncertainty that investors try to avoid.

HOW LOW CAN IT GO? The downside deviation formula is derived from the one used for standard deviation, but instead of measuring the variance from the average return, this considers only returns that fall below a threshold or minimum acceptable return. In the downside deviation formula, the number reflects both the instances that the return did not exceed the target return and the magnitudes of the underperformance. The upshot: An investor would like to see this number as low as possible for a given stock.

And so to this week's screen. Using the universe of stocks ranked 4 STARS (accumulate) or 5 STARS (buy) by Standard & Poor's equity analysts -- meaning they're expected to outperform the overall market over the next 6 to 12 months -- we looked for the 20 issues with the lowest downside deviations. The calculation used monthly returns from June, 1999, to May, 2002. Our minimum acceptable return in this instance was 0%.

The downside deviations of the resulting 20 stocks range from 1.567 to 3.792. In contrast, the S&P 500's downside deviation is 3.45 over the same period. The average downside deviation for all of S&P's 4 and 5 STAR stocks is 7.98.

Here are the 20 names that emerged:

Weingarten Realty (WRI)

Vornado Realty (VNO)

Transatlantic Holdings (TRH)

ExxonMobil (XOM)

Aventis (AVE)

Chelsea Property (CPG)

Boston Properties (BXP)

Dentsply International (XRAY)

TotalFinaElf (TOT)

McCormick & Co. (MKC)

Federated Investors (FII)

Anheuser-Busch (BUD)

Commerce Bancorp (NJ)


Varian Medical (VAR)

Hilb Rogal & Hamilton (HRH)

Washington Post (WPO)

New York Times (NYT)

Constellation Brands (STZ)

Sysco Corp. (SYY)

El Paso Energy Partners (EPN) De Guia is a portfolio services analyst for Standard & Poor's

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