PT  - JOURNAL ARTICLE
AU  - Javier Estrada
TI  - Practical Applications of Replacing the Failure Rate: <em>A Downside Risk Perspective</em>
AID  - 10.3905/pa.6.3.296
DP  - 2019 Jan 31
TA  - Practical Applications
PG  - 1--4
VI  - 6
IP  - 3
4099  - https://pm-research.com/content/6/3/1.2.short
4100  - https://pm-research.com/content/6/3/1.2.full
AB  - In Replacing the Failure Rate: A Downside Risk Perspective, published in the Spring 2018 issue of The Journal of Retirement, Javier Estrada (IESE Business School) suggests a new metric for evaluating asset allocation and withdrawal strategies for retirement planning. He proposes replacing the widely used “failure rate,” with a measure called the “downside risk-adjusted success” ratio (D-RAS). The failure rate indicates the frequency with which a strategy fails to supply a retiree with a sustained stream of withdrawals for his full retirement period (e.g., to age 95). A shortcoming of the failure rate is that it does not distinguish among strategies based on how badly they fail-that is, by the average number of years that they fail to sustain withdrawals during retirement. By contrast, D-RAS reflects the frequency with which a strategy succeeds in providing sustained withdrawals, the average number of shortfall years when the strategy fails, and the downside variability of failure.A key feature of D-RAS is that is focuses only on the downside variability of a strategy’s performance. Unlike other measures, it does not penalize a strategy for producing upside variability (e.g., large bequests at the end of the retirement period).TOPICS: Retirement, risk management, analysis of individual factors/risk premia