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Suppose that each of two investments has a 4% chan...

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Solution


Question

Suppose that each of two investments has a 4% chance of loss of $10 million, a 2% chance of a loss of $1 million, and a 94% chance of a profit of $1 million. They are independent of each other. 1)What is the VaRfor one of the investments when the confidence level is 95%? 2)What is the expected shortfall when the confidence level is 95%? 3)What is the VaRfor a portfolio consisting of the two investments when the confidence level is 95%? 4)What is the expected shortfall for a portfolio consisting of the two investments when the confidence level is 95%? 5)Show that, in this example, VaRdoes not satisfy the subadditivitycondition whereas expected shortfall does.

 

Paper#5333 | Written in 18-Jul-2015

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