- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 5. Portfolio Mathematics
- Subject 3. Shortfall Risk and Roy's Safety-First Criterion

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**CFA Practice Question**

A portfolio manager is concerned about not keeping up with the rate of inflation. His portfolio has a mean return of 9% with a variance of 144. If inflation is expected to be 3.5%, what is the shortfall risk (i.e., the portfolio return being less than 3.5%)?

A. 32.3%

B. 67.7%

C. 50%

**Explanation:**Based on the z transformation, z = (3.5 - 9)/12 = -0.4583. From standard normal tables, Prob(z <= -0.4583) = 0.3228, or 32.3%.

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**User Contributed Comments**
5

User |
Comment |
---|---|

danlan |
It is less than 50% but greater than 0% so it can only be A. |

aakash1108 |
Variance = 144 and therefore St.Dev = 12.... |

Shaan23 |
your good at taking square roots. |

Cfrey |
you're good at spelling. |

rojaslav |
Nice |