Safety first ratio value

[BA]

For the SFR value is it a "-" value. I mean you look it up in the "-" value z table?


So if the value is 1.3 do you look up -1.3



Edited 1 time(s). Last edit at Friday, January 27, 2006 at 06:21AM by BA.

 

[JeffJ21]

You don't need to use any tables. It's just the shapre ratio with a lowest acceptable level instead of a risk free rate.

 

[moosetopher]

BA

I think this is what you are looking for

Expected Return on portfolio is 25%
SD = 35%
Shortfall Return Level (Rl) = 2.5%

SFRatio = (25-.025)/.35 = .6429

Now if you want find the probability that this portfolio will return less than shortfall return level, simply take 1-N(SFRratio) = 1-N(.6429) = 1-.7389 = .2611 = 26.11%

N(SFRatio) denotes Z = .6429 from the table (i.e. 73.89% of area under the curve above 2.5% return) the remainder is the probability that you fall short.

Ya Dig!

 

[oatmeals2]

moosetopher Wrote:
-------------------------------------------------------
> BA
>
> I think this is what you are looking for
>
> Expected Return on portfolio is 25%
> SD = 35%
> Shortfall Return Level (Rl) = 2.5%
>
> SFRatio = (25-.025)/.35 = .6429
>
> Now if you want find the probability that this
> portfolio will return less than shortfall return
> level, simply take 1-N(SFRratio) = 1-N(.6429) =
> 1-.7389 = .2611 = 26.11%
>
> N(SFRatio) denotes Z = .6429 from the table (i.e.
> 73.89% of area under the curve above 2.5% return)
> the remainder is the probability that you fall
> short.
>
> Ya Dig!


My apologies for bumping an old thread.

Same as the original topic, the question is on page 221 of book1:

Portfolio A has a safety-ratio of 1.3 with a thresthold return of 2 percent. What is the shortfall risk for a target return of 2 percent?

I intuitively chose P(Z<1.3)=.903 (wrong)

The correct answer is mentioned by the poster above: 1-N(SFRatio)= 1-.903= 0.0968 (correct)

My question is why are we taking the right tail? To my understanding, P(Z<1.3) represents the probability our returns would be less than threshold(of 2%) while P(Z>1.3) represent our returns above threshhold. I guess I'm going this the wrong way, anyone care to enlighten me?