Can I say shortfall risk is from return perspective and VAR is from loss?
Other part looks pretty similar…
Shortfall Risk (or risk of loss): It refers to the probability of actual return being less than the target return. From a historical distribution of returns.
Value at Risk (VAR):It provides an estimate of loss (in money terms) that is expected to be exceeded with a given level of probability over a specified time period.
Any thoughts?
It’s basically the same, you just solve for different variables.
You have your portfolio value, a probability and a loss. When calculating VaR, you set the probability to a fix value (e.g. 5%) and calculate the loss, i.e. the VaR. For shortfall risk, you set the loss to a fixed amount and calculate the probability. So when you set the shortfall risk amount to the VaR amount, you’ll end up with your VaR probability as the shortfall risk. It’s just 2 different ways to look at it. Shortfall risk would usually be used if there is an amount you need to preserve (e.g. you can just loose 100k and want to make sure the risk of loosing more is minimal). VaR is needed in most other cases as it will just tell you how much loss would be “likely” (depending on the probability).
I hope that makes it more clear.
I remember it as VAR - the V is Value and the end result will get you a Value. So you input % to get the Value.
Shortfall Risk is the reverse - Input Value and get %