The use of expected shortfall (ES) is most appropriate when
A)there is a small sample size used to estimate probability distributions.
B)the VAR indicates there is no possibility of losses so another method must be used to determine market risk.
C)the probability distribution is skewed to the right.
D)a continuous probability distribution cannot be constructed.
E)The probability distribution indicates there is a possibility of a "fat tail" loss.

Question

Quizplus · Accepted Answer

Expected shortfall (ES) is a risk measure that is appropriate when the probability distribution of losses is skewed to the right or has a "fat-tailed" distribution, meaning there is a higher likelihood of extreme losses than under a normal distribution. ES is more robust than Value at Risk (VAR) in such cases because it estimates the expected loss beyond the VAR level, which is important in extreme loss scenarios. ES is not specifically related to sample size, the construction of continuous probability distributions, or the possibility of losses - these are all factors that apply to other risk measures.

The Use of Expected Shortfall (ES) Is Most Appropriate When