am I missing something, or are these the same exact idea/calculation? My guess is that VAR is typically used with a low enough return so that it is 5 or 10%, whereas shortfall risk in practice is possibly calculated to something nearer to a required return for some kind of liability… is that more or less the difference? The calculation seems the same.

Short fall risk is in percentage terms and the calculations is something close to Roy’s Safety First Ratio while VAR gives minimum monetary value expected to be lost with a certain confidence within a given period.

Shortfall risk is the inverse of VAR. VaR gives you the monetary loss in % terms, Shortfall risk gives you the % of losing a certain amount.

bpdulog Wrote: ------------------------------------------------------- > Shortfall risk is the inverse of VAR. VaR gives > you the monetary loss in % terms, Shortfall risk > gives you the % of losing a certain amount. Huh?? You mean shortfall risk will also indicate the confidence level?

shorfall is a confidence level too shuns.

me.tega Wrote: ------------------------------------------------------- > bpdulog Wrote: > -------------------------------------------------- > ----- > > Shortfall risk is the inverse of VAR. VaR > gives > > you the monetary loss in % terms, Shortfall > risk > > gives you the % of losing a certain amount. > > Huh?? You mean shortfall risk will also indicate > the confidence level? Value at risk (VAR) A probability-based measure of loss potential for a company, a fund, a portfolio, a transaction, or a strategy over a specified period of time. (Level III Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives , 4th Edition. Pearson Learning Solutions G-19). Shortfall risk The risk that portfolio value will fall below some minimum acceptable level during a stated time horizon; the risk of not achieving a specified return target. (Level III Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives , 4th Edition. Pearson Learning Solutions G-17). Does it make sense now? One is given a probability you will lose at least/at most x amount and the other is what are the chances of not gaining or losingx amount? VAR: 5% chance of losing at least $100 million. Shortfall: 5% chance of portfolio declining below $500 million or 10% chance portfolio return will not be 20%.

shortfall risk is not an amount two kids.

bpdulog Wrote: ------------------------------------------------------- > Shortfall risk is the inverse of VAR. VaR gives > you the monetary loss in % terms, Shortfall risk > gives you the % of losing a certain amount. Thanks; that is helpful. But it only reinforces the idea that we actually have two names for the very same thing. Neither VAR or Shortfall risk is going to mean anything without *both* a probability and a return (or dollar loss). Portfolio of $1billion VAR: 5% of chance of losing at least $100 million. Shortfall: 5% chance of portfolio declining below $900 million. It’s a one-tailed t-test. They say the same thing. Right?

The two are very similar, neither provides magnitude of loss. VAR is also for a specific time period, like month.

If you want to break it down to its simplest components: VaR is a dollar amount of the minimum loss given a % interval. You can also flip it and say it is the maximum loss you can expect given a % (i.e. 5% chance your portfolio won’t lose more than $2 million). The problem is it won’t tell you the magnitude of your worst loss. Shortfall is the % of not meeting some sort of objective (return or % return). Suffers from the same issue of not determining what your worst case will be.