It says: Portfolio A has a safety-first ratio of 1.3 with a threshold return of 2%. What is the shortfall risk for a target return of 2%? Answers: A. 90.30% B. 40.30% C. 9.68% D. 49.68% I don’t understand exactly how they come up with the answer. Help.
having some issues with this one as well…anyone?
Ok, I understand now. You have to go back and read p.258-259. It says “the SFR is the # of SD below the mean. Thus the larger SFR has the lower prob. of return below the threshold return.” Then it says “using the standard normal dist tables, we can find the prob in the left-hand tails as indicated.” That’s it. So if SFR is 1.3, that means that we have to find F(-1.3), because 1.3 is the # of SD BELOW the mean. This is why we need to find F(-1.3), instead of F(1.3). And we use the cdf because shortfall risk is the risk of falling below the target. So F(-1.3) will give us the prob of falling below the 2% target, hence the shortfall risk.
Mel_2008 Wrote: ------------------------------------------------------- > Ok, I understand now. > You have to go back and read p.258-259. > > It says “the SFR is the # of SD below the mean. > Thus the larger SFR has the lower prob. of return > below the threshold return.” Then it says “using > the standard normal dist tables, we can find the > prob in the left-hand tails as indicated.” > > That’s it. So if SFR is 1.3, that means that we > have to find F(-1.3), because 1.3 is the # of SD > BELOW the mean. This is why we need to find > F(-1.3), instead of F(1.3). And we use the cdf > because shortfall risk is the risk of falling > below the target. So F(-1.3) will give us the prob > of falling below the 2% target, hence the > shortfall risk. So what is the answer then? Are you given the tables?
If i remeber correctly it was C=9.68%
That’s right. 9.68% Yes you look it up in the z-table