A type of portfolio risk that measures the likelihood that the actual return on the portfolio would drop below a specific level (target return). This likelihood is calculated using tools and techniques of probability, not as a currency amount. For instance, if the target return of a portfolio is set at 12% for the year ahead, its shortfall risk is defined as the probability that its actual return will turn out to be below the target return 12% at the end of the year.

Portfolio managers typically construct their portfolios in such a way as to reduce shortfall risk. A shortfall risk can be defined as the expected total return minus a specific number of standard deviations (e.g., 12% – 2 S.D)