Shortfall risk - expected return minus 2 standard deviation formula

CFA Level III Portfolio Management
#1

Hi All,

Can someone please point out where the formula for shortfall risk, (expected return - 2 standard deviation) is covered in the Schweser notes? It seems to be coming up over and over again in questions but cant find it in the notes.

-Maisha

#2

I don’t remember seeing the formula anywhere either. But after seeing it in the question/answer once, you can basically treat it as if it’s foundational statistical knowledge. 2 standard deviation = 95% of the normal distribution. 95% confidence level is often used.

#3

CFA Institute has used it in a few morning session exam questions in the past; I’d have to hunt through my old exams to see where.

There’s nothing particularly special about it. The real point is that you should be aware that you might get some quantitative risk requirement for candidate portfolios, and that one of the candidate portfolios will likely fail that requirement; be sure to test each portfolio against whatever criteria you’re given (be they risk, return, concentration, or whatever)