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PROBLEMFORVAR ANDESSuppose that each of two investments has a 0.9% (.009) chance of a loss of $10 million, a 99.1% chance of a loss of $1 million, and 0% chance of a profit. The investments are independent of each other. a.What is the VaR for one of the investments when the confidence level is 99%?b.What is the expected shortfall for one of the investments when the confidence level is 99%?c.What is the VaR for a portfolio consisting of the two investments when the confidence level is 99%?d.What is the expected shortfall to a portfolio consisting of the two investments when the confidence level is 99%?e.Show that in this example VaR does not satisfy the subadditivity condition whereas expected shortfall does.
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Spring '13
Rossomano
Probability, var, Value at risk, Confidence Level, Expected shortfall