Suppose that each of two investments has a 0.9% chance of a loss of $10 million, a 99.1% of a loss of $1, and 0% chance of a profit. The investments are independent of each other. (a) what is the var for one of the investments when the confidence level is 99%? (b) what is the expected shortfall for one of the investments when the confidence level is 99%? (c) what is the var for a portfolio consisting of the two investments when the confidence level is 99%? (d) what is the expected shortfall for a portfolio consisting of the two investments when the confidence level is 99%? (e) show that in this example var does not satisfy the subadditivity condition whereas expected shortfall does. (f) what is the difference between expected shortfall and var? What is the theoretical advantage of expected shortfall over var?
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There are two independent investments and each investment has 0.9% chance of a loss of $10 million 99.1% chance of a loss of $1 million 0% chance of profit Explanation of the given factors
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