ABC Bank believes that the underlying distribution of its loan returns should follow a normal distribution with a mean of 10 and a standard deviation of 3. The following table identifies tail VARs at different confidence levels. Assume the initial analysis uses five tail slices. Calculate the expected shortfall at the 97% confidence level and identify the effect on ES when the number of tail slices increases.
　　Confidence level    Tail VAR
　　95%                  3.00
　　96%                  3.25
　　97%                  3.60
　　98%                  4.00
　　99%                  4.75
　　Expected Shortfall   Increasing Slices
　　A.         4.117           ES increases
　　B.         4.117           ES decreases
　　C.         4.375           ES increases
　　D.         4.375           ES decreases
　　Answer: C
　　The expected shortfall calculation takes the average of the expected shortfalls at varying confidences in the tail region. Note that the tail VAR at 97% is not included in the calculation since ES is the average loss beyond 3% VAR. In addition, as the number of tail slices increases, the average ES will increase as the number of higher confidence tail VARs increases.
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