Investments, tenth edition

 Example  5.11 

Shortfall Risk in the Short Run and the Long Run 

 A warning: The  probability  of a shortfall is an incomplete measure of investment risk. 

Such probability does not take into account the  size  of potential losses, which for some 

of the possible outcomes (however unlikely) amount to complete ruin. The worst-case 

scenarios for the 25-year investment are  far  worse than for the 1-month investment. We 

demonstrate the buildup of risk over the long run graphically in  Figures 5.10  and  5.11 .  

 A better way to quantify the risk of a long-term investment would be the market price 

of insuring it against a shortfall. An insurance premium must take into account both the 

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6/18/13   8:04 PM

6/18/13   8:04 PM

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