Question

Suppose that each of two investments 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. They are independent of each other.
(a) What is the VaR for one of the investments when the confidence level is 95%?
(b) What is the expected shortfall when the confidence level is 95%?
(c) What is the VaR for a portfolio consisting of the two investments when the confidence level is 95%?
(d) What is the expected shortfall for a portfolio consisting of the two investments when the confidence level is 95%?
(e) Show that, in this example, VaR does not satisfy the subadditivity condition whereas expected shortfall does.


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  • CreatedJuly 30, 2015
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