qingshu

 

AIM 6: Explain CreditRisk+ and its weaknesses.

1、With respect to CreditRisk+, which of the following is FALSE?

A) CreditRisk+ works well with data that have fat-tails.

B) CreditRisk+ only focuses on default events and ignores prices, spreads and credit migrations.

C) Factor correlations are not addressed with the CreditRisk+ model.

D) CreditRisk+ may not be appropriate for use with portfolios that do not use a buy-and-hold strategy.

qingshu

 

The correct answer is A

CreditRisk+ only focuses on default events and ignores prices, spreads and credit migrations. In addition, factor correlations are not addressed with the CreditRisk+ model and it may not be appropriate for use with portfolios that do not use a buy-and-hold strategy. Because the model does not consider factor correlations it may not capture events associated with fat-tailed distributions.

qingshu

 

2、A weakness of CreditRisk+ is that it:

A) does not address factor correlations.

B) ignores actuarial data.

C) cannot be used for buy-and-hold strategies.

D) does not use the Poisson distribution.

qingshu

 

The correct answer is A

The factor correlations are not addressed in the approach. Not including correlations could reduce the ability to capture outcomes associated with fat-tailed distributions. The other three possible answers are incorrect in that CreditRisk+ uses an actuarial approach and the Poisson distribution, and it most readily applies to buy-and-hold strategies.

qingshu

 

AIM 7: Define expected loss, unexpected loss, value at risk, economic capital, and expected shortfall.

1、An unexpected loss is defined as:

A) the standard deviation of portfolio losses. 

B) the product of the exposure, the probability of default, and the loss given default.

C) the amount of capital needed as a buffer to avoid insolvency.

D) the average or expected value of all losses greater than the VAR. 

qingshu

 

The correct answer is A

Unexpected loss is defined as the standard deviation of portfolio losses. Expected loss is the product of the exposure, the probability of default, and the loss given default. Economic capital is the amount of capital needed as a buffer to avoid insolvency, and expected shortfall is the average or expected value of all losses greater than the VAR

qingshu

 

2、The measure known as “unexpected loss” is best described as:

A) the average of losses greater than VAR.

B) None of the above.

C) the average of losses less than VAR.

D) the confidence level of VAR.

qingshu

 

The correct answer is B

Unexpected loss is the standard deviation of portfolio losses. It does not directly relate to VAR.

qingshu

 

3、Subtracting the expected loss from VAR gives the measure known as:

A) unexpected loss.

B) economic capital.

C) expected shortfall.

D) hazard rate.

qingshu

 

The correct answer is B

Economic capital = VAR – E(LP). It is an amount of capital needed as a buffer to avoid insolvency.