A
Avviey
Member
Hi,
this question asks you to explain the limitation of shortfall probability and the 2nd limitation says it ignores the extent of shortfall below the benchmark L. Example given is :
If L=0, one will prefer +$1 with probability 0.49 and -$1m with probability 0.51 to the one that offers +$1m with probability 0.5 and -$2 with probability 0.5.
I dont think its right, regardless of the extent of shortfall which is ignored by shortfall probability anyway, then one should prefer the lower probability that below the benchmark, in this case should be -$2 with probability 0.5. Because if you look at the answer to Q2.3 on page5 for chapter 2, the logic behind it makes sense which says the investment B was preferred as it gave the lower shortall probability regardless of the return given, so there is abit inconsistency between this quesion and Q1.8 above?
I'm confused. Thanks very much.
this question asks you to explain the limitation of shortfall probability and the 2nd limitation says it ignores the extent of shortfall below the benchmark L. Example given is :
If L=0, one will prefer +$1 with probability 0.49 and -$1m with probability 0.51 to the one that offers +$1m with probability 0.5 and -$2 with probability 0.5.
I dont think its right, regardless of the extent of shortfall which is ignored by shortfall probability anyway, then one should prefer the lower probability that below the benchmark, in this case should be -$2 with probability 0.5. Because if you look at the answer to Q2.3 on page5 for chapter 2, the logic behind it makes sense which says the investment B was preferred as it gave the lower shortall probability regardless of the return given, so there is abit inconsistency between this quesion and Q1.8 above?
I'm confused. Thanks very much.
