Suppose that each of two investments has a 4% chance of a loss of $10 million,...

Suppose that each of two investments has a 4% chance of a loss of $10 million, a 2% chance of a loss of $1 million, and a 94% chance of a profit of $1 million. They are independent of each other.
a. What is the VaR for one of the investments when the confidence level is 95%?
b. What is the expected shortfall for one of the investments when the confidence level is 95%?
c. What is the VaR for a portfolio consisting of the two investments when the confidence level is 95%?
d. What is the expected shortfall to a portfolio consisting of the two investments when the confidence level is 95%?
e. Show that in this example VaR does not satisfy the subadditivity condition whereas expected shortfall does.

Solutions

Expert Solution

milcah answered 9 months ago

Next > < Previous

Related Solutions

Suppose that each of two investments has a 4% chance of loss of $10 million, a...

Suppose that each of two investments has a 4% chance of loss of $10 million, a 2% chance of loss of $1 million, and a 94% chance of profit of $1 million. They are independent of each other. a. What is the VaR and CVaR (expected shortfall) at level p = 95% for one of the investments? b. What is the VaR and CVaR (expected shortfall) at level p = 95% for a portfolio consisting of the two investments? c....

Suppose that you have two investments, each of which has a 0.9% chance of a loss...

Suppose that you have two investments, each of which has a 0.9% chance of a loss of $10 million and a 99.1% chance of a loss of $1 million. These two investments are independent of each other. (1) What is the VaR for one of the investments at the 99% confidence level? (2) What is the expected shortfall for one of the investments at the 99% confidence level? (3) What is the 99% VaR for a portfolio consisting of the...

Suppose company ZZ has issued 10 million shares which are trading at GHS 5 each; 4...

Suppose company ZZ has issued 10 million shares which are trading at GHS 5 each; 4 million preference shares at GHS 4 and 1,500 bonds at GHS 10,000 each. What is this company’s capital structure? What is the minimum amount that ZZ must generate annually to satisfy its 3 classes of investors, if the coupon rate on the bonds is 20%, the dividend rate on the preference shares is 24% and equity holders require 30% on their investment? The company’s...

You are trying to decide between two investments. The first investment has a 90% chance to...

You are trying to decide between two investments. The first investment has a 90% chance to make you $2,000, but the alternative is that you could be losing $5,000. The second investment has a 15% chance to make you $25,000, but the alternative is that you could be losing $5,000. Use expected value to help decide which investment is the mathematically smart choice. (Hint: make two separate expected values and compare).

suppose there is a 32% chance of rain for each of the next two days, find...

suppose there is a 32% chance of rain for each of the next two days, find the following probabilities. a. it doesn't rain tomorrow? b it rains tomorrow and the next day? consider whether independent or dependent. c. it rains tomorrow or the next day? consider whether mutually exclusive or not. d. it rains at least once over the next two days?

. A mutual fund has $10 million in investments, a beta of 1.05 and a 9.5%...

. A mutual fund has $10 million in investments, a beta of 1.05 and a 9.5% required return. The risk-free rate is 4.2%. a. Apply the capital asset pricing model to calculate the market rate of return. b. Suppose the fund receives an additional $5 million in investment assets. These new assets are invested in stocks with an average beta of 0.65. Calculate beta for the combined ($15 million) portfolio. c. Calculate the required rate of return for the combined...

Suppose Bob has income of $50,000. There is a 10% chance that Bob will get sick...

Suppose Bob has income of $50,000. There is a 10% chance that Bob will get sick and lose half of his income. Suppose Bob’s income-utility relationship is given by the following equation, where I is Bob’s income. U(I) = √2I Use the facts above to calculate the following: a) The premium and payout for a full and fair insurance contract. b) The max premium (i.e. the most Bob would ever be willing to pay for insurance)

Suppose the country's money supply is equal to $10 million. The FED buys $4 million worth...

Suppose the country's money supply is equal to $10 million. The FED buys $4 million worth of bonds from Wells Fargo customers depositing it in their bank accounts. Wells Fargo then lends out 60% of the new deposits. At this point: 1. What is the new total money supply? 2. What is the money multiplier? -------------------------------------------------------- KeyBank has assets of $101 in reserves, $27 in bonds, and $600 in loans as well as $370 in Demand Deposits. 3. Given that...

Suppose a bank has $100 million of assets to invest in either risky or safe investments....

Suppose a bank has $100 million of assets to invest in either risky or safe investments. The first option is to put all assets in the safe investment, which will result in a 5% return and yield $105 one year from now. A second option is to put all the assets in the risky option, which will result in either a 50% return ($150 million) or a 40% loss ($60 million) with equal probability. If the bank can pay to...

Parramore Corp has $10 million of sales, $1 million of inventories, $4 million of receivables, and...

Parramore Corp has $10 million of sales, $1 million of inventories, $4 million of receivables, and $1 million of payables. Its cost of goods sold is 70% of sales, and it finances working capital with bank loans at an 9% rate. Assume 365 days in year for your calculations. Do not round intermediate steps. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places. ??? days If Parramore could lower its...

Subjects