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Upside Potential Ratio

The upside potential ratio is a performance metric that compares the average returns of an asset or portfolio during positive market periods (gains) to its risk, specifically downside risk. It highlights how effectively an asset generates returns relative to the risk of losses. A higher upside potential ratio indicates that the asset delivers more positive returns for a given level of downside risk, making it an attractive investment in bullish markets.

Example

An asset with an upside potential ratio of 2 means that for every unit of downside risk, the asset delivers twice as much in positive returns during upswings.

Key points

• Compares an asset’s average returns during market gains to its downside risk.

• A higher ratio indicates better performance relative to downside risk.

• Useful for evaluating investments in bullish market conditions.

Quick Answers to Curious Questions

It helps investors understand how much positive return they can expect relative to the risk of losses, making it a useful tool for evaluating risk-adjusted performance.

It indicates that the asset is capable of generating strong returns for each unit of downside risk, suggesting it performs well in rising markets.

The Sharpe ratio measures total risk-adjusted returns, while the upside potential ratio focuses specifically on positive returns relative to downside risk.