b) Suppose that your bank is considering investing in a one-year project. The investment will cost $10 million and has an 80% chance of generating $19 million income, a 10% chance of generating $13 million income, a 7% chance of generating $8 million income and a 3% chance of generating nothing. i) Illustrate the cumulative probability distribution for this project's gains and losses [Feel free to draw the distribution by hand and paste a picture of it]. ii) What is the one-year VaR for the project when the confidence level is 95%. What does it mean? iii) What is the Expected Shortfall (ES) when the confidence level is 95%? iv) What information does the Expected Shortfall measure provide which the VaR does not?
b) Suppose that your bank is considering investing in a one-year project. The investment will cost $10 million and has an 80% chance of generating $19 million income, a 10% chance of generating $13 million income, a 7% chance of generating $8 million income and a 3% chance of generating nothing. i) Illustrate the cumulative probability distribution for this project's gains and losses [Feel free to draw the distribution by hand and paste a picture of it]. ii) What is the one-year VaR for the project when the confidence level is 95%. What does it mean? iii) What is the Expected Shortfall (ES) when the confidence level is 95%? iv) What information does the Expected Shortfall measure provide which the VaR does not?
Chapter8: Sequences, Series,and Probability
Section8.7: Probability
Problem 4ECP: Show that the probability of drawing a club at random from a standard deck of 52 playing cards is...
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![b) Suppose that your bank is considering investing in a one-year project. The investment will
cost $10 million and has an 80% chance of generating $19 million income, a 10% chance
of generating $13 million income, a 7% chance of generating $8 million income and a 3%
chance of generating nothing.
i) Illustrate the cumulative probability distribution for this project's gains and losses
[Feel free to draw the distribution by hand and paste a picture of it].
ii) What is the one-year VaR for the project when the confidence level is 95%. What
does it mean?
iii) What is the Expected Shortfall (ES) when the confidence level is 95%?
iv) What information does the Expected Shortfall measure provide which the VaR
does not?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ffe17cd79-4564-4c51-958f-a871ce15295b%2F503219fa-00a2-45de-b2e4-a82c6e24de8d%2Fvvsbtft_processed.png&w=3840&q=75)
Transcribed Image Text:b) Suppose that your bank is considering investing in a one-year project. The investment will
cost $10 million and has an 80% chance of generating $19 million income, a 10% chance
of generating $13 million income, a 7% chance of generating $8 million income and a 3%
chance of generating nothing.
i) Illustrate the cumulative probability distribution for this project's gains and losses
[Feel free to draw the distribution by hand and paste a picture of it].
ii) What is the one-year VaR for the project when the confidence level is 95%. What
does it mean?
iii) What is the Expected Shortfall (ES) when the confidence level is 95%?
iv) What information does the Expected Shortfall measure provide which the VaR
does not?
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