A Division of Windham Capital Management, LLC

Probability of Loss

Probability of loss is used to determine the likelihood of a specified loss or gain over an investment horizon. Instead of evaluating the monetary loss or gain at a given confidence, an investor determines the probability that a specified monetary loss or gain will occur.

Probability of loss uses the expected distribution of returns in order to estimate potential loss. We estimate probability of loss from a portfolio’s expected return and standard deviation under the assumption that the portfolio’s returns are log-normally distributed.

Absolute probability of loss estimates the likelihood of an investor’s portfolio incurring a specified absolute loss. Relative probability of loss estimates the likelihood of underperforming the benchmark by a given amount.

Category:Understanding the Software -> Exposure to Loss