qingshu

 

4、Assume a portfolio consists of two loans of $1,000 with a correlation between loans of 0. Also, assume the only two outcomes for each loan with equal probability are a loan loss of $8 or $12. Note that the average loss for each position is $10 and the expected loss on the portfolio is $20. Find ULp, the unexpected loss of the portfolio.

A) $2.83.

B) $0.71.

C) $8.00.

D) $10.00.

qingshu

 

The correct answer is A

E(Li) = $10, E(Lp) = $20,

ULp = ((0.25)(16 ? 20)2 + (0.5)(20 ? 20)2 + (0.25)(24 ? 20)2)0.5 = $2.828.

qingshu

 

5、The expected loss given that the loss has exceeded the VAR is best described as the

A) expected shortfall.

B) unexpected loss.

C) economic capital.

D) Poisson parameter.

qingshu

 

The correct answer is A

Expected shortfall is essentially an average or expected value of all losses greater than the VAR. An expression for this is: E[LP | LP > VAR].

qingshu

 

AIM 8: Explain, including equations, the individual contribution to unexpected losses.

Assume a portfolio consists of two loans of $1,000 with a correlation between loans of 0. Also, assume the unexpected loss of both loans is $2 and portfolio unexpected loss is $2.828. Find RC1, the risk contribution of loan 1 to unexpected losses.

A) $0.71.

B) $1.41.

C) $2.

D) $2.83.

qingshu

 

The correct answer is B

The sum of each individual risk contribution will equal the unexpected loss of the portfolio.

The risk contribution to loan 1 = UL1 ×(UL1 + ρ×UL2) / ULP

RC1 = 2 × (2 + 0(2))/2.828 = 1.4144.