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If the odds of default are 1:5, what is the probability of default?
Suggested Answer: C
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Concentration risk in a credit portfolio arises due to a high degree of correlation between the default probabilities of the issuers of securities in the portfolio. For example, the fortunes of the issuers in the same industry may be highly correlated, and an investor exposed to multiple such borrowers may face 'concentration risk'.
A low degree of correlation, or independence of individual defaults in the portfolio actually reduces or even eliminates concentration risk.
The fact that issuers are from the same country may not necessarily give rise to concentration risk - for example, a bank with all US based borrowers in different industries or with different retail exposure types may not face practically any concentration risk. What really matters is the default correlations between the borrowers, for example a lender exposed to cement producers across the globe may face a high degree of concentration risk.
35 comments · newest first
SO
Socorro
10 months ago
I thought it was 12%... this is confusing!
ID
Idella
11 months ago
Yup, B is the right answer!
LA
Laticia
11 months ago
Wait, are we sure it's not 16.67%?
VE
Venita
11 months ago
Definitely going with B, 20% is correct!
RA
Ramonita
11 months ago
The probability of default is 20% based on 1:5 odds.
CH
Charlene
12 months ago
I’m leaning towards 16.67% too, but I just want to double-check my calculations before I commit to that answer.
TA
Tamera
12 months ago
I’m not entirely sure, but I feel like I might be mixing up odds and probability. Is it possible that the answer could be 20%?
DO
Donte
12 months ago
I remember practicing a similar question where we had to convert odds to probability. I think the formula is something like odds / (odds + 1).
WI
Wilda
1 year ago
I think the odds of 1:5 means there’s one default for every five non-defaults, so maybe it’s around 16.67%?
RO
Rodrigo
1 year ago
I think the key here is to remember that odds are not the same as probability. To convert the odds of 1:5 to a probability, I need to divide the first number by the sum of the two numbers, which gives me 1/6 or 16.67%. The answer is A.
WI
Wilburn
1 year ago
Wait, I'm confused. If the odds are 1:5, doesn't that mean the probability of default is 20%? I'm not sure I'm understanding this correctly.
TA
Tamesha
1 year ago
Okay, I've got this. If the odds of default are 1:5, that means the probability of default is 1 out of 6, or 16.67%. The answer is A.
LO
Lottie
1 year ago
Hmm, I'm a bit unsure about this one. The odds of default are given as 1:5, but I'm not sure how to use that to calculate the probability. I'll need to review my probability formulas.
HO
Hortencia
1 year ago
This looks like a straightforward probability question. I'll need to think through the odds of default and how to convert that to a probability.
ST
Stephania
1 year ago
Wait, if the odds are 1:5, does that mean the probability is 50%? Because it's a coin flip, right? Oh, no, I think I'm overthinking this. Let me re-read the question carefully.
TE
Tequila
1 year ago
It's actually 20.00%
HO
Holley
1 year ago
I believe it's 16.67%
CI
Ciara
1 year ago
I think the probability is 20.00%
BE
Beth
1 year ago
D) 50.00%
EI
Eileen
1 year ago
C) 12.00%
KA
Kasandra
1 year ago
B) 20.00%
DO
Dominic
1 year ago
A) 16.67%
DO
Dorothy
1 year ago
I bet the correct answer is B) 20.00%. After all, 1 out of 6 events is a default, so the probability has to be 20%. I'm feeling confident about this one!
HY
Hyun
1 year ago
Hmm, let's see. If the odds are 1:5, that means the probability of default is 12%. Because the total number of possible outcomes is 6, and the number of favorable outcomes is 1. Easy peasy!
JE
Jeanice
1 year ago
Oh, I see. Thanks for clarifying!
BA
Barrie
1 year ago
Actually, it's 12.00% because the odds are 1:5.
VE
Veronique
1 year ago
I think the probability of default is 20.00%.
ST
Stephaine
1 year ago
Wait, what? If the odds are 1:5, that means the probability of default is 50%. It's a 50/50 chance, right? This question is a trick!
EL
Elfriede
1 year ago
The odds and probability are different. The correct answer is 20.00%.
CL
Claribel
1 year ago
No, the probability of default is not 50%. It's actually 20%.
PA
Patti
1 year ago
I'm pretty sure the probability is 20%. The odds of 1:5 means that for every 6 events, 1 of them is a default. So the probability of default is 1/6 or 20%.
GO
Goldie
2 years ago
Okay, let's think this through. If the odds of default are 1:5, that means the probability of default is the number of favorable outcomes (1) divided by the total number of possible outcomes (1 + 5 = 6). So the probability should be 1/6 or 16.67%.
NI
Nicholle
2 years ago
I'm not sure, but I think the answer is A) 16.67% as well. It makes sense based on the odds given.
KA
Kathryn
2 years ago
I agree with Margret, because the probability is calculated by dividing 1 by the sum of the odds plus 1.
MA
Margret
2 years ago
I think the answer is A) 16.67%