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Suppose that two projects A and B have a 0.7% chance of a loss of $ 8 million, a 2.3% chance of a loss of $1 million, and a 97% chance of a profit of...
Suppose that two projects A and B have a 0.7% chance of a loss of $ 8 million, a 2.3% chance of a loss of $1 million, and a 97% chance of a profit of $1 million. The losses on these two investments are distributed independently of each other.
a. What is the VaR for one of the investments when the confidence level is 99%? The Var using cumulative property for one of the investments of A is 1 million dollars
b. What is the expected shortfall (ES) for one of the investments when the confidence level is 99%?
Cvar = (8,000,000 *.007) + (1,000,000 * .023) / .001 = 7.9 million
c. Show the probability distribution of losses/profits for a portfolio consisting of both investments. You need to determine all possible losses/gains on this portfolio and calculate corresponding probabilities.
d. What is the VaR when of the portfolio consisting of both investments when the confidence level is 99%?
e. What is the expected shortfall to a portfolio consisting of the two investments when the confidence level is 99%?
f. Based on your findings, what is your conclusion about the shortcoming of VaR as opposed to using ES?
