Suppose each of the two independent investment projects has a probability of 1% of a loss...
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Suppose each of the two independent investment projects has a probability of 1% of a loss of $10 million and a probability of 99% of a loss of $1 million during one year period. Suppose we set the confidence level a to be 98.5%. (a) Calculate the VaR and Expected Shortfall for one of the investments. (b) Calculate the VaR for a portfolio containing these two investments. Check whether subadditivity is satisfied. (c) Calculate the Expected Shortfall for a portfolio containing these two investments. Verify that subadditivity is satisfied. (d) With the potential loss of subadditivity in VaR, suppose VaR is used as the risk mon- itoring criterion in a financial institution. How can a fund manager game around in portfolio choices that may result in undesirable risk exposure in portfolio of invest- ments. Suppose each of the two independent investment projects has a probability of 1% of a loss of $10 million and a probability of 99% of a loss of $1 million during one year period. Suppose we set the confidence level a to be 98.5%. (a) Calculate the VaR and Expected Shortfall for one of the investments. (b) Calculate the VaR for a portfolio containing these two investments. Check whether subadditivity is satisfied. (c) Calculate the Expected Shortfall for a portfolio containing these two investments. Verify that subadditivity is satisfied. (d) With the potential loss of subadditivity in VaR, suppose VaR is used as the risk mon- itoring criterion in a financial institution. How can a fund manager game around in portfolio choices that may result in undesirable risk exposure in portfolio of invest- ments.
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a Calculate the VaR and Expected Shortfall for one of the investments To calculate the Value at Risk VaR for one investment we need to find the loss corresponding to the confidence level of 985 Since ... View the full answer
Related Book For
Financial Theory and Corporate Policy
ISBN: 978-0321127211
4th edition
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri
Posted Date:
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