Instructions

You are a manager at Ventus LLC, a producer of onshore wind farms. You are planning two large projects, one in Massachusetts and one in New York. While some companies have already committed to purchase energy from the wind farms, there is some risk that the projects will fail and generate a loss for the company. The CEO has asked you to give her your risk assessment of the two projects. You have to decide whether you want to pitch the two projects individually or as one big project.

Problem Set

Based on historical data, you calculated the loss probabilities. Suppose that each of two projects has a 4% chance of a loss of $10 million, a 2% chance of a loss of $1 million, and a 94% chance of a profit of $1 million. Since the two wind farms are located in two different US states, you can assume that they are independent of each other.

Answer the following questions:

What is the VaR for one of the projects when the confidence level is 95%? What is the VaR for a portfolio consisting of the two projects when the confidence level is 95%? Comparing the VaR for the individual projects and the portfolio, what do you observe? What can explain or support your observations?

Using the data that you have just calculated, would you want to pitch the two projects individually or as one big project? Create a pitch to your CEO that explains your decision. Support your decision using your calculations and responses from the above questions.

Submit your assignment as an Excel file. Include your pitch in the Excel file (as text in the cells).