Expected Shortfall

Expected shortfall, also known as Conditional Value at Risk (CVaR), is a risk management metric that measures the average loss an investment portfolio might experience in the worst-case scenarios beyond a specific confidence level. Unlike Value at Risk (VaR), which only considers the threshold loss, expected shortfall provides a more comprehensive view by averaging losses in the tail end of the distribution. This metric is particularly useful in assessing the risk of extreme losses and is widely used by financial institutions, fund managers, and risk analysts.

Example

A bank uses expected shortfall to assess the average loss it could face during extreme market downturns, helping to determine capital reserves needed for such events.