. Portfolio Risk Each of two independent projects has a probability 0.98 of a loss of $1 million, 0.01 probability of a loss of $10 million and 0.01 probability of a loss of $20 million (1) What is the 97% VaR for each project? (2) What is the 97% expected shortfall for each project? (3) What is the 97% VaR for the portfolio (two projects)? (4) What is the 97% expected shortfall for the portfolio?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
13
1. Portfolio Risk
Each of two independent projects has a probability 0.98 of a loss of $1 million, 0.01
probability of a loss of $10 million and 0.01 probability of a loss of $20 million
(1) What is the 97% VaR for each project?
(2) What is the 97% expected shortfall for each project?
(3) What is the 97% VaR for the portfolio (two projects)?
(4) What is the 97% expected shortfall for the portfolio?
Step by step
Solved in 3 steps with 2 images
