Consider a zero-coupon corporate bond that promises to pay a return of 12% next period. Suppose that there is a 20% chance that the issuing company will default on the bond payment, in which case there is an equal chance of receiving a return of either 8% or 0%.
(i) Define "shortfall probability"?
(ii) Calculate values for the following measures of investment risk:
(a) downside semi-variance
(b) shortfall probability based on the risk-free rate of return of 8.5%
(c) the expected shortfall below the risk-free return conditional on a shortfall occurring.