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Expected Shortfall

0 votes
asked Feb 14 in BUS 4028F - Financial Economics by anonymous

Is the expected shortfall of a risk free asset always zero? If not, why? How would one find it? 

1 Answer

+1 vote
answered Feb 14 by Vegan (720 points)
Best answer
It is zero if you set your benchmark less than or equal to the risk free return (r) but if you were to set your benchmark return (L) to be above r then you would have a certain shortfall.

Expected shortfall relies on the randomness of returns but a risk free asset has a guaranteed return. The return is like a piece-wise function which will be some fixed value r with probability = 1 and takes on any other value with probability = 0. It's probably better to think of it as a certain shortfall, rather than an expected shortfall in this case.