Semivariance is a statistical term that measures how observations vary within a sample. It deals only with observations that lie below the average value, or mean, of the sample. To calculate semivariance, you add up the squares of the differences between the sample mean and each observation that falls below the mean, and then divide the result by the number of such observations.
Measuring Risk
Investors can use semivariance to measure the downside risk of an investment portfolio. For example, you can observe the previous month's return on each investment in your portfolio, calculate the mean return and remove all data points above the mean. Next, apply the semivariance formula to find the average loss the portfolio is likely to suffer. The larger the semivariance, the greater the portfolio's downside risk. Investors sensitive to risk can take steps to reduce the portfolio's risk by replacing investments having returns furthest below the mean with ones closer to or above the mean.
Using a Spreadsheet
You can use a spreadsheet to calculate semivariance by setting up a column with all observed returns within a portfolio, sum the column and divide by the number of observations to get the mean. Next, remove all observations above the mean, and in another column subtract each remaining observation from the mean. In a third column, square the differences, take the sum and divide by the number of below-mean observations. While semivariance can indicate the relative riskiness of different portfolios, it in no way guarantees the extent of future investment losses.