bkballa

If you want to break it down to its simplest components:

VaR is a dollar amount of the minimum loss given a % interval. You can also flip it and say it is the maximum loss you can expect given a % (i.e. 5% chance your portfolio won't lose more than $2 million). The problem is it won't tell you the magnitude of your worst loss.

Shortfall is the % of not meeting some sort of objective (return or % return). Suffers from the same issue of not determining what your worst case will be.

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