Expected Shortfall (or Conditional VaR or CVar)

Expected Shortfall is defined as the average of all losses which are greater or equal than VaR, i.e. the average loss in the worst (1-p)% cases, where p is the confidence level. Said differently, it gives the expected value of an investment in the worst q% of the cases. It is important to clarify that CVaR is NOT the worst case scenario – the worst case scenario is always a 100% loss, and in case of many leveraged instruments, a loss exceeding 100% of the initial investment. CVaR is simply an average of losses past arbitrarily selected risk threshold – so for 95% VaR, CVaR will represent the average of outcomes in the worst 5% of the cases. Expected Shortfall is the opposite of Expected Upside.

expected shortfall CVAR

Distribution of expected portfolio returns with 95% confidence interval and 1 week time horizon – Expected Shortall is the red bars.

 

 

Other UCITS related terms

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