In: Math
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.