A risk assessment metric quantifies the expected loss given that the loss is at or beyond a specific threshold. For example, if a portfolio’s assessment indicates a 5% threshold, it estimates the average loss the portfolio is expected to incur during the worst 5% of outcomes. This provides a more comprehensive understanding of potential downside risk than simply identifying the threshold value itself.
This approach offers improved risk management by providing a more complete picture of potential losses, particularly in extreme scenarios. This enhanced understanding allows for more informed decision-making regarding risk mitigation strategies. Its development addressed limitations in earlier methods that only focused on a single threshold, offering a more nuanced perspective on the magnitude of losses beyond that point, leading to better capital allocation and risk adjusted return.
