Question
Question 2 Consider the following discrete probability distribution of payoffs for two securities, A and B, held in the trading portfolio of a bank: Probability
Question 2
Consider the following discrete probability distribution of payoffs for two securities, A and B, held in the trading portfolio of a bank:
Probability Payoff A
55.00% $120m
44.00% $95m
1.00% -$1,100m
Probability Payoff B
55.00% $120m
44.00% $100m
0.30% -$1,100m
0.70% -$1,414m
a) What is the expected return of security A and the expected return of security B?
[3 marks]
b) According to VaR (Value at Risk), which security is adding more market risk to the bank's trading portfolio? Make sure your calculations are clear and explain your answers.
[5 marks]
c) According to ES (Expected Shortfall), which security is adding more market risk to the bank's trading portfolio? Make sure your calculations are clear and explain your answers.
[5 marks]
d) Compare your answers in items b) and c) and discuss the advantages and pitfalls of each of the two risk measures.
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