Suppose that each of two investments has a 1.5% chance of a loss of $10 million and
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Question:
- Suppose that each of two investments has a 1.5% chance of a loss of $10 million and a 98.5% chance of a loss of $ 1.50 million. The investments are independent of each other. when the confidence level is 83 %.
- (a) What is the VaR for one of the investments?
- (b) What is the expected shortfall for one of the investments?
- (c) What is the VaR for a portfolio consisting of the two investments?
- (d) What is the expected shortfall for a portfolio consisting of the two investments?
- (e) Show that in this example VaR does not satisfy the subadditivity condition, whereas expected shortfall does.
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