Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are a manager at Ventus LLC , a producer of onshore wind farms. You are planning two large projects, one in Massachusetts and one

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 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:
1) What is the VaR for one of the projects when the confidence level is 95%?
Options:
a. $10 million
b.$1 million
c. $400 thousand
d. $20 thousand
e. $420 thousand
2) What is the VaR for one of the projects when the confidence level is 99%?
Options:
a.$10 million
b. $1 million
c. $400 thousand
d. $20 thousand
e. $420 thousand
3) What is the VaR for a portfolio consisting of the two projects when the confidence level is 95%?
Options:
a. $10 million
b. $0 million
c. $9 million
d. $11 million
e. $20 million
f. $2 million
4) What is the VaR for a portfolio consisting of the two projects when the confidence level is 99%?
Options:
a. $10 million
b. $0 million
c. $9 million
d. $11 million
e. $20 million
f. $2 million
5) Comparing the VaR for the individual projects versus the portfolio approach, which presents least risk to the CEO?
Options:
a. The portfolio approach since the VaR is lower
b. The individual project approach since VaR is higher
c. Go with individual projects because VaR is always subadditive
d. Depends on the chosen confidence level
e. Not enough information to be able to calculate risk

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Financial Risk Management Enterprise Wide Risk Management In Theory And Practice

Authors: Donald Van Deventer, Kenji Imai, Mark Mesler

3rd Edition

1547416157, 9781547416158

More Books

Students also viewed these Finance questions

Question

How do patients across cultures prefer to make medical decisions?

Answered: 1 week ago