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What is expected shortfall

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Reference no: EM133305699

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 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 for a portfolio consisting of the two investments when the confidence level is 95%?

(e) Show that, in this example, VaR does not satisfy the subadditivety condition whereas expected shortfall does.

Reference no: EM133305699

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