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There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds over a one year horizon are 0.03 and 0.08 respectively. If the default correlation is zero, what is the one year expected loss on this portfolio?
Suggested Answer: C
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For EVT, we use the block maxima or the peaks-over-threshold methods. These provide us the data points that can be fitted to a GEV distribution.
Least squares and maximum likelihood are methods that are used for curve fitting, and they have a variety of applications across risk management.
34 comments · newest first
JO
Josue
10 months ago
I got $5.5m after running the numbers.
KA
Karon
11 months ago
Wait, are we sure about the correlation being zero? Seems odd.
LE
Lettie
11 months ago
Definitely not $11m, that's way too high!
SH
Shala
11 months ago
I think it's closer to $5.26m.
EL
Elza
11 months ago
The expected loss is calculated using the formula for expected loss = probability of default × exposure.
MA
Marisha
12 months ago
I’m leaning towards option B, but I’m not completely confident. I should probably double-check my calculations for each bond's expected loss.
HU
Hubert
12 months ago
I feel like I might have seen a question like this where we had to consider the correlation, but since it's zero here, it should simplify things a bit.
LI
Lino
12 months ago
I think the expected loss is the sum of the individual expected losses from each bond, but I can't recall the exact formula we used in class.
RE
Reiko
1 year ago
I remember calculating expected loss in a similar question, but I'm not sure if I should just multiply the probabilities by the market values directly.
CA
Carmela
1 year ago
This looks straightforward enough. I'll start by calculating the expected loss for each bond, then add them together. Shouldn't be too tricky.
PA
Paz
1 year ago
I think I've got this. If the default correlation is zero, then the expected loss is just the sum of the expected losses on each individual bond, right? So we can calculate that and add them up.
EL
Eliseo
1 year ago
Hmm, I'm a bit confused. How do we calculate the expected loss when the default correlation is zero? I'll need to review the formula for that.
ME
Melissa
1 year ago
Okay, let's think this through step-by-step. We have two bonds with different default probabilities, and we need to find the expected loss on the portfolio.
PE
Pete
1 year ago
I'm a bit confused by the wording of this question. I'll need to review my notes on provider integration to make sure I'm interpreting the options correctly.
TA
Tamekia
1 year ago
Ah, I've seen questions like this before. Probability of failure is usually expressed in terms of frequency or likelihood, not just as abstract details. I'm pretty confident B is the right answer here.
ED
Edda
1 year ago
This question seems straightforward, I think the answer is C - small and infrequent losses.
KA
Kattie
1 year ago
This is a simple expected loss calculation. Why are you all making it sound so complicated?
ET
Ethan
1 year ago
D) $1.38m
AB
Abraham
1 year ago
C) $5.5m
BE
Bernardine
1 year ago
B) $5.26m
BO
Bobbye
1 year ago
A) $11m
DA
Dan
1 year ago
I bet the answer is D. It just feels right, you know? But I should probably show my work just to be safe.
RE
Rebecka
2 years ago
Wait, default correlation is zero? Does that mean I can just add the individual expected losses? Let me double-check that.
SU
Sueann
1 year ago
Therefore, the total expected loss for the portfolio would be $1.5m + $4m = $5.5m. So, the answer is C) $5.5m.
CE
Celia
1 year ago
And the expected loss for the second bond would be $50m * 0.08 = $4m.
VE
Veronica
1 year ago
So, the expected loss for the first bond would be $50m * 0.03 = $1.5m.
RO
Rodolfo
1 year ago
The one year expected loss on this portfolio would be $5.26m.
BE
Benton
1 year ago
Yes, you can just add the individual expected losses in this case.
PA
Pamela
1 year ago
Yes, you can just add the individual expected losses because the default correlation is zero.
AN
An
2 years ago
Okay, I think I got this. Gotta plug in the numbers and do the math.
MI
Mickie
2 years ago
But the expected loss is calculated by adding the individual probabilities of default and multiplying by the market value. So, it should be C) $5.5m.
LA
Laurel
2 years ago
Hmm, this one looks tricky. I need to think through the probabilities and expected losses carefully.
AM
Amber
2 years ago
I disagree, I believe the answer is B) $5.26m.
MI
Mickie
2 years ago
I think the answer is A) $11m.