P1.T4.418. Expected and unexpected loss (EL and UL)

[Nicole Seaman]

Concept: These on-line quiz questions are not specifically linked to AIMs, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical AIM-by-AIM question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are well-suited to online simulation.

Questions:

418.1. In regard to a borrower's liability, the exposure amount (EA) is $1.0 million with a default probability of 10.0% and a loss given default (LGD; aka, loss rate) of 70.0%. The standard deviation of the loss rate, sigma(LGD), is 16.0%. Which are nearest, respectively, to the exposure's expected loss (EL) and unexpected loss (UL)?

a. $35,000 and $79,700
b. $35,000 and $183,333
c. $70,000 and $150,000
d. $70,000 and $216,000


418.2. A portfolio contains two credit assets with identical profiles. Each is a $1.0 million exposure amount (EA) with a default probability (PD) of 10.0% and loss given default (LGD) of 30.0%. The standard deviation of the LGD is 20.0%. The default correlation between the two credit assets is 20.0%. Which is nearest to the portfolio's unexpected loss (portfolio UL)?

a. $60,000
b. $85,206
c. $170,411
d. $220,000


418.3. A portfolio contains two credit assets with unexpected losses (UL), respectively, of $110,000 and $200,000. As their default correlation is 22.0%, the portfolio unexpected loss is $248,556. Which is nearest to the risk contribution (RC) of the asset with the greater risk contribution?

a. $143,800
b. $157,200
c. $180,400
d. $203,900

Answers here:

• In forum

 

[David Harper CFA FRM]

FYI, This question concludes the most recent batch of 30 questions for T4 (specifically to load into our interactive quiz which simulates the exam; 30 question = 30% weight on the 100 question Part 1 exam). But I just want to clarify that it's really written in anticipation of the 2015 syllabus (which will include an additional reading on the topic of credit EL/UL/RC). Specifically:

• The 2014 exam assigns Ong Chapter 4 and 5 (but dropped previously assigned Ong Chapter 6) such that the 2014 syllabus strictly includes (for Topic 4) individual credit expected loss (EL) and unexpected loss (UL) but strictly does not include portfolio unexpected loss or risk contribution
• Consequently, strictly 418.2 and 418.3 are meant for 2015. However, they aren't useless ideas currently. RC is another classic application of the first partial derivative which appears often in the FRM. Thanks!