The CFA texts occassionally use shortfall risk interchangeably with Roy’s Safety First but in the answer keys I see shortfall risk defined as
expected return - 2 x standard deviation
Anybody know where I can find this definition in the texts? Ran some searches but had no luck.
Roy’s SF is an ordinal measure of portfolio utility.
Shortfall is a confidence interval.
Don’t sleep on calmer
I haven’t looked at the LIII curriculum, but I’m not sure VaR is used like a confidence interval (isn’t it only looking at downside?).
I believe you’re right. VaR is typically concerned with just the downside.
Expected Shortfall is the loss that would be made if the VaR estimate is breached. If the 1 day VaR at 99% confidence is $1m then expected shortfall is the loss that could be made in that remaining 1%. Both look at the downside only.
It is a confidence interval, in the sense that there is a range with probability distributions. If you are looking at 5% VAR, you look the value at the 5% as the chance that the return would be less than that, or loss more than that.