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Suppose that each of two investments has a 4% chance of loss of $ 10 million, a 2% chance that 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 for one of the investments when the confidence level is 95%?
B. What is the expected shortfall for one investment 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 of for a portfolio consisting of the two investments when the confidence level is 95%?
Calculate all expected returns and standard deviations of all portfolio combinations.
The current spot price of a stock is $21, the expected rate of return of the stock is 11%, and the volatility is 12%. The risk-free rate is 5%. Compute the price of a derivative whose payoff in 5 months is ln(S5/12) + 32, where S5/12 is the stock pri..
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