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 purchasing 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 the two projects individually or as one big project.

Based on historical data, you calculated the loss probabilities. Suppose that each of the two projects has:

$4\%$ chance of a loss of $$10$ million,

$2\%$ chance of a loss of $$1$ million

$94\%$ 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 fllowing quesions:

Question $1$

What is the VaR for one of the projects when the confidence level is $95\%?$ 

Question $2$

What is the VaR for one of the projects when the confidence level is $99\%?$

Question $3$

What is the VaR for a portfolio consisting of the two projects when the confidence level is $95\%?$ 

Question $4$

What is the VaR for a portfolio consisting of the two projects when the confidence level is $99\%?$

Answer rating: 100% (QA)

To calculate the Value at Risk VaR for the projects we need to consider the loss probabilities and confidence levels provided VaR represents the maxim... View the full answer