During the financial crisis of 2008, one particular measure of risk became very popular. Many financiers and government officials started talking about the expected shortfall. It designates the expected loss of a portfolio in the worst ‘x’ percentage of cases.
The expected shortfall can tell us:
- What is the expected loss of a portfolio in the worst 1% of all possible cases?
- How much is a bank’s expected loss if loans perform poorly – the worst 1% of all possible cases?
Other related topics you might be interested to explore are the Safety-first ratio, the Sharpe ratio, and Roy’s criterion.
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Expected shortfall is among the topics included in the Quantitative Methods module of the CFA Level 1 Curriculum.
