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Chapter 2

This document contains practice problems related to risk measures for investment portfolios. It includes questions about calculating semi-variance and variance as risk measures for different portfolios. It also asks about the differences between value-at-risk (VaR) and expected shortfall, and compares their theoretical advantages. Several problems provide hypothetical investment scenarios and ask the reader to calculate VaR and expected shortfall values at different confidence levels.

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63 views2 pages

Chapter 2

This document contains practice problems related to risk measures for investment portfolios. It includes questions about calculating semi-variance and variance as risk measures for different portfolios. It also asks about the differences between value-at-risk (VaR) and expected shortfall, and compares their theoretical advantages. Several problems provide hypothetical investment scenarios and ask the reader to calculate VaR and expected shortfall values at different confidence levels.

Uploaded by

Ping Leung
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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AIN 3220: Investment and Risk Analysis

Chapter 2: Risk Measures


Practice Problems

1. Assume that Portfolio A, measured in unit of millions, has the following loss dis-
tribution:

-$10 pA (−$10) = 0.92,

A
L = $ 10 pA ($10) = 0.06, (0.1)

$20 pA ($20) = 0.02.

Consider a multipler c = 2, and define a new portfolio Ā = 2A.

(a) Using Semi-Variance as the risk measure, calculate the Semi-variance of the
loss in Portfolio Ā.
(b) Show that the positive homogeneity property does not hold when the Semi-
variance is used as the risk measure.

2. Consider Portfolio A in the last problem and denote a new portfolio à by adding
cash K = $5 million.

(a) Using Semi-Variance as the risk measure, calculate the Semi-variance of the
loss in Portfolio Ã.
(b) Show that the cash invariance property does not hold when the Semi-variance
is used as the risk measure.

3. What is the difference between expected shortfall and V@R? What is the theoretical
advantage of expected shortfall over V@R?

4. A fund manager announces that the fund’s one month 95%V @R is 6% of the size
of the portfolio being managed. You have an investment of $100, 000 in the fund.
How do you interpret the portfolio manager’s announcement?

5. A fund manager announces that the fund’s one month 95% expected shortfall is 6%
of the size of the portfolio being managed. You have an investment of $100, 000 in
the fund. How do you interpret the portfolio manager’s announcement?

6. Suppose that each of two investments has a 0.9% chance of a loss of $10 million
and 99.1% chance of a loss of $1 million. The investments are independent of each
other

(a) What is the V @R 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 V @R for a portfolio consisting of the two investments when the
confidence level is 99%?

1
(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 V @R does not satisfy the subaddivity condition,
whereas expected shortfall does.

7. An investment has a 85% chance of leading a gain of $2 million, a 5% chance of


incurring a loss of $2 million and a 4% chance of incurring a loss of $4 million, a 3%
chance of incurring a loss of $6 million, 3% chance of incurring a loss of $8 million.
Find 96%V @R of this investment.

8. An investment has a 85% chance of leading a gain of $2 million, a 5% chance of


incurring a loss of $2 million and a 4% chance of incurring a loss of $6 million, a 3%
chance of incurring a loss of $6 million, 3% chance of incurring a loss of $8 million.
Find 96% Expected Shortfall of this investment.

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