Learning objectives: Differentiate between a one-tailed and a two-tailed test and identify when to use each test. Interpret the results of hypothesis tests with a specific level of confidence. Demonstrate the process of backtesting VaR by calculating the number of exceedances.
Suppose you invest in a product whose returns follow a uniform distribution between −40% and
+60%. What is the expected return? What is the 95% VaR? The expected shortfall?
The expected return is +10%. The 95% VaR is 35% (i.e., 5% of the returns are expected to be