Expected ShortfallRisk Management
Expected Shortfall is an important metric that reveals information not included in Value at Risk. It’s also called Expected Tail Loss, Conditional Value at Risk, or Average Value at Risk. While Value at Risk gives you the loss at a confidence level (the 90%/95%/99% worst return from an investment) it doesn’t tell you what normally happens if you exceed it. Expected Shortfall tells you what the expected loss would be if you exceed a Value at Risk confidence level. It simply averages the returns beyond the confidence level. If you have a 95% confidence level, it averages the lowest 5% of all returns. For 90% confidence level, the lowest 10% of all returns are averaged. These will consist of only losses.
Expected shortfall is highly valuable. We recommend you calculate both percentage loss expected beyond a confidence level and convert the percentages to total dollar amount lost in the actual position or portfolio. We regularly use these for determining if our initial fixed stop loss and trailing overall stop loss are adequate for absorbing painful accidents. If using historically expected shortfall, the further this number is from the mean the more likely extreme negative returns exist.
Expected Shortfall has an alternate variation for positive returns called Expected Tail Return. Instead of averaging the lowest expected returns below a confidence level across the deviation of returns (which are losses) it averages the highest expected returns above a confidence level (which are gains). This allows you to view what is expected to happen on average if you exceed a specific confidence level of returns, and compare it to tail losses. Obviously higher is better, and the further away from the mean return the more likely extreme positive returns could exist. The expected tail return would use the top 1%, top 5%, and top 10% of all returns.
Did we help you? Vote with a Crypto-Donation!
Donate Bitcoin Cash
International Economic Analysis:
- Major Currency Economic Summaries
- Performance of Major Imports and Exports
- Mandates of Central Banks versus Expectations
- Performance Indexes of Major Economies
- Economically Correlated Currency Projections
- Large Funds Currency Sentiment Readings
- List of Technical Indicators to Look For
- Occasional: Foregin Exchange Technicals Markups
American Markets Analysis:
- Summaries of American Economic Structure
- Performance of Major
- Federal Reserve Mandate versus Expectations
- Performance Indexes of U.S Economy
- Economically Correlated U.S Dollar Projections
- Large Trading Fund Index Sentiment Readings
- Market Wide Earnings Versus Valuations
- Fundamental Ranking of U.S Business Sectors
- Best and Worst Future Consensus Estimates
- Occasional: Firm Fundamental Strength Report
- List of Technicals to Look for While Trading
Investment and Finance, Serviced by Amazon
A Concise Guide to Macroeconomics, Second Edition: What Managers, Executives, and Students Need to Know
A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market
Algorithmic Trading: Winning Strategies and Their Rationale
Alternative Investments: CAIA Level I (Wiley Finance)
Alternative Investments: Instruments, Performance, Benchmarks, and Strategies