 # shortfall risk

http://www.analystforum.com/phorums/read.php?13,947772,947874#msg-947874 seemingly simple - shortfall risk vs. semivariance Posted by: mumukada (IP Logged) Date: May 1, 2009 03:11AM An analyst is considering various risk measures to apply to a bond portfolio. She requires a measure that accounts for the magnitude of the losses. Given this requirement, as she considers using the semivariance and/or shortfall risk, she would reject using: A) both shortfall risk and the semivariance. B) shortfall risk but not the semivariance. C) the semivariance but not shortfall risk.

A

A

A

A

C

a

A shortfall risk is usually def as E®- 2 sd semivariance is variance on the downside so yah both

Prudent trap? yeah prudence trap is def a bias here on these but i am sure the answer is A ( Overconfridence trap) i looked at 20 websites and foundd one that agrees with me ( Confriming bias) . Plus all the other correct answers in the past were A so i am sure this trend will conmtinue ( Status quo ) the first post by Sniper is what made me think its A ( Anchorinng)…in the past i tried to go againsty all my biases and got burnt badlly i was widely ridiiculed as crazy ( Recallability bias)

:D…good review notes. ===================================== Re: seemingly simple - shortfall risk vs. semivariance Posted by: mumukada (IP Logged) Date: May 1, 2009 09:02AM B is correct. Shortfall risk gives an indication of the probability of not achieving a minimum return. The semivariance gives a measure expressed in returns. can someone explain how semi variance gives a “measure that accounts for the magnitude of losses?”

i disagree check out vol3 pg 234 last para

I read p234-235,… anywhere says that semivariance does not account for the magnitude of the losses? I couldn’t find out.

deriv108 Wrote: ------------------------------------------------------- > I read p234-235,… anywhere says that > semivariance does not account for the magnitude of > the losses? > > I couldn’t find out. cfai vol 3 234 last paragraph shortfall risk is one example of the larger concept of downside risk./ Downside risk include not only shortfall risk…

V4, p113. Deficiency: Shortfall risk does not account for the magnitude of losses in money terms. But it does say that this a deficiency of semivariance. Aren’t the outliers reflected in semivariance or variance?

maybe I am wrong semivariance is almost same with std , like 5% possiblility bolow xxx value at risk also shows 5% minumum loss and we know VAR can not measure extreme result furthermore it will not work in non normal distribution . exteme losses are always negative skewness and high kurtosis I think in definition magnitude can be shown as 5% below xxx loss … not mean you should list specific loss

thanks deriv

deriv108 Wrote: ------------------------------------------------------- > :D…good review notes. > > > ===================================== > Re: seemingly simple - shortfall risk vs. > semivariance > Posted by: mumukada (IP Logged) > Date: May 1, 2009 09:02AM > > B is correct. > > Shortfall risk gives an indication of the > probability of not achieving a minimum return. The > semivariance gives a measure expressed in returns. > > > can someone explain how semi variance gives a > “measure that accounts for the magnitude of > losses?” This question is from 2009, are you sure this is accurate? The curriculum may have been changed.

not direct answer from book. But at least we know that the shortfall risk shows two places: asset allocation and fixed income.

semi variance is only taking those returns that are below the “target return or mean” and calculates a variance for those terms… given that only lossy terms are used in the calculation, it does give a measure of the losses. A measure of the dispersion of all observations that fall below the mean or target value of a data set. Semivariance is an average of the squared deviations of values that are less than the mean. The formula for semivariance is as follows: 1/n * (sum ( avrage - ri) ^ 2)) Where: n = the total number of observations below the mean ri = the observed value average = the mean or target value of the data set Investopedia Says: Semivariance is similar to variance; however, it only considers observations below the mean. A useful tool in portfolio or asset analysis, semivariance provides a measure for downside risk. While standard deviation and variance provide measures of volatility, semivariance only looks at the negative fluctuations of an asset. By neutralizing all values above the mean, or an investor’s target return, semivariance estimates the average loss that a portfolio could incur. Read more: http://www.answers.com/topic/semivariance#ixzz1Ml5yuwpr