S15 Q5(iii)(b) v. A15 Q2(iii)

[positivepotato23987]

S15 seems to use P(20000-10000S5 > t) = 0.05 whereas A15 uses P(X<t)=0.05

I've tried to verify the 2 answers using P(X<-t) = 0.05 for both and it works for A15 but not S15. Can someone explain to me why?

 

[positivepotato23987]

More so on why S15 uses > t = 0.05!

 

[positivepotato23987]

I'd just looked at the mark scheme for S15 and it says we can do it both ways, either the 95% or 5%. Can someone explain why the values differ here?

 

[John Potter]

The interpretation of S15 Q5(iii)(b) that is consistent with the Course Notes is to think that there’s a 95% chance that the value of the shareholding at time 5 will be no more than €12,851 below the “target value” of €20,000. In other words, there’s a 95% chance that the value of the shareholding at time 5 will exceed €7,149.

The examiners at the time also allowed for the “95% Value at Risk” to be interpreted as there being a 95% probability (as opposed to a 5% probability) of any loss being worse than x. This is a highly unusual "risk measure" to calculate.

Historically if an exam question is set where an ambiguity/confusion could be settled by the Examiners stating that a mistake was made in the question setting, it usually turns out that no mistake was made but instead it was a matter of interpretation.

The important point for you is that we learn to always state our interpretation of an (arguably ambiguous) question and proceed accordingly - cover yourself on exam day, basically,

Good luck!
John

 

[positivepotato23987]

That makes sense, looks like I will stick to what I know, making sure to 'cover myself'. Thank you!