Suppose the expected shortfalls calculated for two segments of a business are $55 million and $110...

Suppose the expected shortfalls calculated for two segments of a business are $55 million and $110 million. The correlation between the losses is estimated as 0.5.

a) Expected Shortfall is __________ million.

Expert Solution

Answer

As the name denotes Correlation means relationship between two variable (data). It defines the relationship value in numeric terms. The value of correlation lays between -1 to 1.

-1 denotes that the variables have perfect negative relation i.e. if one increases then second goes down or vice-versa.

+1 or positive 1 denotes that variables have perfect positive correlation means one increases than the second also increases

And

0 denotes that there is no correlation exists between them

In the given case

The correlation between the losses of two segments is 0.5

It denotes if one segment’s losses rises then the second’s losses also increases by 0.5 or vice versa

Here we have expected loss of $one segment is $55 million

Than the loss of second segment also increases by 0.5

= $55 x .05 = $ 27.5 million

Then the total loss is = $55 million + $27.5 million = $ 82.5 million

jeff jeffy answered 2 years ago

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