Analyze_This

In my understanding, a shortfall risk is the risk that the portfolio will fall below its value... normally, if someone mentions that they want to control that risk, she/he exhibits high risk aversion..

Look at it this way.. picture a bell-shaped curve... 2.5% of the left tail has a Z-score of 1.96.. you are essentially saying that I want my returns lay within the curve.. I want to be 97.5% confident that that will happen.. hence, the formula for shortfall risk = R - 1.96*sd (or rounding it to R-2*sd..



Edited 1 time(s). Last edit at Tuesday, May 25, 2010 at 01:34AM by kurmanal.