Exercise Solution 1.7

  1. This is a function of the conditional distribution of the portfolio’s market value , so it is a PMMR.
  2. Net cash flow is generally unrelated to portfolio market value. Accordingly, this cannot be expressed as a function of and the conditional distribution of . It is not a PMMR.
  3. While beta is a function of and the conditional distribution of , additional information is required about the “market portfolio” in order to calculate beta. Accordingly, beta is not a PMMR.
  4. ETL is a PMMR. If we know  and the conditional distribution of , we can calculate the conditional distribution of loss 1L. With that, we can calculate both the portfolio’s VaR and then the expected loss conditional on that loss exceeding the VaR, which is ETL.

 

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