Shortfall ratio

1. Suppose that a certain fund has reached a value of $10m. At the end of the next year, the fund managers wish to withdraw $500,000 for additional funding purposes, but do not wish to tap into the original $10m. There are three possible investment options as shown in below table. Which option is most preferable? (You may assume normally distributed returns throughout.)

a. Please complete the information SFRatios for all three portfolio and probabilities for each portfolio return to run below the shortfall level. Show your calculation process.

b. What is your advice to the client with regards to the choice of the portfolio and discuss the reason.

Portfolio A

Expected Return - 0.42

Standard Deviation- 0.32

SFRatio

P(RL)

Portfolio B

Expected Return - 0.31

Standard Deviation- 0.26

SFRatio - ?

P(RL) - ?

Portfolio C

Expected Return - 0.08

Standard Deviation- 0.1

SFRatio - ?

P(RL) - ?

Answer rating: 100% (QA)

To calculate the Shortfall Ratio SFRatio and the probability of return being less than the shortfall ... View the full answer