A company has invested $1,000,000 in a new project that has an expected return of 10% with
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A company has invested $1,000,000 in a new project that has an expected return of 10% with a standard deviation of 15%. The company has also identified that the project has a 10% chance of producing a loss in any given year. The company is risk-averse and wants to ensure that its risk exposure is within acceptable limits.
a) Calculate the expected return and standard deviation of the investment.
b) Calculate the value at risk (VaR) for a one-year time horizon at a 95% confidence level.
c) Calculate the conditional value at risk (CVaR) for the same time horizon and confidence level.
d) Based on the results of parts (b) and (c), discuss whether the company's risk exposure is within acceptable limits.
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