Skip to content

IAI Actuarial Core Principles · Economic Modelling · Measures of investment risk

An investor in a Mumbai-based mutual fund defines shortfall probability as the probability that the annual return falls below a chosen threshold. Which statement about shortfall probability as a risk measure is correct?

Shortfall probability only gives the chance that return falls below a threshold and ignores how large the shortfall is. Severity needs measures such as semi-variance or expected shortfall, so statements about averages, variance or maximum expected return are wrong.

  1. AIt measures the average size of losses below the threshold
  2. BIt takes no account of how far returns fall below the thresholdCorrect
  3. CIt is identical to the variance of returns
  4. DIt is always minimised by the portfolio with the highest expected return
  5. It equals the semi-variance divided by the threshold

Explanation

Shortfall probability counts only how likely it is that the return falls below the threshold. It ignores the magnitude of the shortfall, which is why semi-variance or expected shortfall is used for severity. The other statements confuse it with severity measures or variance.

Did you get it right without looking?

One question tells you little. A timed set on Measures of investment risk shows your real accuracy, how long you take and where you lose marks.

Practise Measures of investment riskFree diagnostic mock

More Measures of investment risk questions