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
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.
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