Discuss AIWMI CCRA-L2 Exam Topic 4 Question 130

Scott is a credit analyst with one of the credit rating agencies in Indi

a. He was looking in Oil and Gas Industry companies and has presented brief financials for following 4 entities:

Two credit analysts are discussing the DM-approach to credit risk modeling. They make the following statements:

Analyst A: A portfolio's standard deviation of credit losses can be determined by considering the standard deviation of credit losses of individual exposures in the portfolio and summing them all up.

Analyst B: I do not fully agree with that. Apart from individual standard deviations, one also needs to consider the correlation of the exposure with the rest of the portfolio so as to account for diversification effects. Higher correlations among credit exposures will lead to higher standard deviation of the overall portfolio.

AOnly Analyst A is correct

BBoth are correct

COnly Analyst B is correct

DBoth are incorrect

Suggested Answer: C

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12 comments · newest first

Dominga 2 months ago

Both have valid points, but B covers more ground.

Erinn 2 months ago

I agree with Analyst A, it's simpler to sum them up.

Sherell 2 months ago

I think Analyst B is correct. Correlation matters!

Brynn 2 months ago

I think A is missing a key part of the equation.

Lemuel 2 months ago

Both have valid points, but B is more comprehensive.

Lucy 3 months ago

Wait, can you really just sum them up? Sounds off.

Yuriko 3 months ago

Totally agree with Analyst B! Correlation matters.

Ashleigh 3 months ago

Analyst A's point is too simplistic.

Miesha 3 months ago

I recall that correlation plays a big role in portfolio risk. Analyst A's statement seems too simplistic to me, so I think Analyst B is on the right track.

Desmond 3 months ago

I'm not entirely sure, but I feel like both analysts might have a point. Maybe there's a nuance in how they approach the standard deviation calculation?

Rosalind 3 months ago

I think I might have seen a similar question in our practice exams. It was about how diversification impacts risk, which makes me lean towards Analyst B being correct.

Alyce 4 months ago

I remember studying that the standard deviation of a portfolio isn't just a simple sum of individual exposures. Analyst B seems to have the right idea about correlations.

AIWMI CCRA-L2 Exam - Topic 4 Question 130 Discussion