1) [10 points] A small investment firm has two trading desks and the 5% Expected
ID: 3270125 • Letter: 1
Question
1) [10 points] A small investment firm has two trading desks and the 5% Expected Shortfall
(ES) for the two desks has been computed to be $2 million and $0.9 million respectively. An analyst at the firm has been told to compute a firm-wide 5% ES value and so reports the sum of the two values, i.e. $2.9 million, as the firm-wide ES since he has learned that ES is a coherent risk measure. In a few sentences (absolutely no need to write a whole page), critique this approach.
2) [7.5 points] A financial firm has invested in an asset in an emerging market and would like to compute a 5% monthly VaR for the asset’s returns. The asset, being in an emerging market, has only been in existence for 9 years and so the fund has data only on 108 monthly returns. An analyst at the firm has recently taken a course on Risk Management, where she has heard about the semi-parametric method of Extreme Value Theory (EVT) used in computing VaR. She has learned that the method is quite robust because it does not make very strong assumptions in modeling and so she is thinking of using EVT to compute the asset’s VaR. In the context of her situation, would you recommend that she use EVT?
a) Yes b) No
Please provide a BRIEF (one or two sentences will suffice) justification of your choice. You will
not get ANY credit if you fail to provide an explanation in words
Explanation / Answer
a) well, we can begin by stating the obvious that the given approach does not conatin any interval forget 5% ES interval. When trying to estimate we can never be sure that the value of ES will be 2.9 mil.
b) Yes, given the robustness of the method while the number of observations is pretty small we can easily find if there are any outliers using EVT and know a 5% VaR
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.