Expected shortfall

Expected shortfall (ES) is a risk measure—a concept used in the field of financial risk measurement to evaluate the market risk or credit risk of a portfolio. The "expected shortfall at q% level" is the expected return on the portfolio in the worst ${\displaystyle q}$% of cases. ES is an alternative to Value at Risk that is more sensitive to the shape of the tail of the loss distribution.

Expected shortfall is also called Conditional Value at Risk (CVaR), Average Value at Risk (AVaR), and expected tail loss (ETL).

ES estimates the risk of an investment in a conservative way, focusing on the less profitable outcomes. For high values of ${\displaystyle q}$ it ignores the most profitable but unlikely possibilities, while for small values of ${\displaystyle q}$ it focuses on the worst losses. On the other hand, unlike the discounted maximum loss, even for lower values of ${\displaystyle q}$ the expected shortfall does not consider only the single most catastrophic outcome. A value of ${\displaystyle q}$ often used in practice is 5%.

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