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Shortfall Risk | Finance Train

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Common Probability Distributions

20 lessons0%

Lessons

What is a Probability Distribution

Discrete Vs. Continuous Random Variable

Cumulative Distribution Function

Discrete Uniform Random Variable

Bernoulli and Binomial Distribution

Stock Price Movement Using a Binomial Tree

Tracking Error and Tracking Risk

Continuous Uniform Distribution

Normal Distribution

Univariate Vs. Multivariate Distribution

Confidence Intervals for a Normal Distribution

Standard Normal Distribution

Calculating Probabilities Using Standard Normal Distribution

Shortfall Risk

Safety-first Ratio

Lognormal Distribution and Stock Prices

Discretely Compounded Rate of Return

Continuously Compounded Rate of Return

Option Pricing Using Monte Carlo Simulation

Historical Simulation Vs Monte Carlo Simulation

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Shortfall Risk

Shortfall risk refers to the probability that a portfolio will not exceed the minimum return level (target return; benchmark return). Shortfall-risk is more consistent with the investors’ intuitive perception of risk in that it focusses more on the real economic risk of an investor. On the other hand, the standard deviation is rather a measure of the volatility of financial assets. Shortfall risk is also known as downside risk.

The following diagram illustrates shortfall risk. As we can see, it is the risk that the portfolio value will fall below some minimum acceptable level, RL.