Question

The gain from a project is equally likely to have any value between -$0.15 million and...

The gain from a project is equally likely to have any value between -$0.15 million and +$0.85 million. What is the 95% value at risk? [Hint: the distribution is uniform.]

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Answer #1

Sol:

Value at risk (VAR) provides information about risk exposure of an investment. It calculates the worst possible loss for an investment over a defined period for a given confidence interval.

The gain from the project is distributed uniformly between −0.15 million and +0.85 million dollars. The probability that it will be between −0.15 million and −0.10 million dollars will be 5%. This means that there is a 95% chance that the loss from the project will not be greater than $0.10 million.

Therefore 95% value at risk will be $0.10 million.

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