§ 01
| Metric | Question Answered | Limitation |
|---|---|---|
| VaR (95%) | What’s the worst loss 95% of the time? | Says nothing about the other 5% |
| Expected Shortfall (95%) | When losses exceed VaR, what’s the average? | Harder to backtest |
| Maximum Drawdown | What’s the worst peak-to-trough decline? | Only uses one data point (the worst) |
§ 02
Expected Shortfall is always larger than VaR and gives a more honest picture of tail risk. If your 95% VaR is $50K but your Expected Shortfall is $150K, the tail is very fat — your rare bad days are three times worse than the VaR threshold suggests.
§ 03
Compare VaR to Expected Shortfall for your portfolio. If ES is much larger than VaR, your portfolio has significant tail risk — the rare bad events are much worse than the typical bad event.
§ 04
Portfolio A: VaR $50K, ES $60K. Portfolio B: VaR $50K, ES $200K. Same VaR, very different risk profiles. Which is riskier?
§ 05
§ 06
Portfolio A: 95% VaR $100K, 99% VaR $200K, Expected Shortfall (95%) $250K. Portfolio B: 95% VaR $100K, 99% VaR $150K, ES $140K. Which has worse tail risk?
Five questions · AI feedback
Sit with the ideas.
Two portfolios both report a 95% daily VaR of $50,000. Portfolio X holds diversified large-cap stocks. Portfolio Y holds concentrated biotech positions. Which likely has higher Expected Shortfall, and why?
Why: