AIM 6: Define, calculate and interpret risk contributions within a portfolio.

1、The individual risk contribution to unexpected loss depends on all of the following EXCEPT the:

A) unexpected loss of all the assets in the portfolio.

B) unexpected loss of the portfolio.

C) correlations of the unexpected losses of the individual positions.

D) confidence level.

The correct answer is D

The individual risk contribution to unexpected loss is not dependent on a confidence level.

AIM 8: Define, calculate and interpret the effect correlation has on the expected and unexpected losses in a portfolio.

1、Bank X has two equal-sized and maturity loans of $5,000,000 each. The drawdowns on both loans are 65% and expected drawdown given default is also 65%. Both loans fall in the same risk class with a 1% probability of default and 75% loss given default. The remainder of the relevant loan information is summarized below:

Expected loss for the portfolio is closest to:

A)    $33,000.

B)    $65,000.

C)   $250,000.

D)   $115,000.

The correct answer is B

AE = OS + (COM - OS) × UGD

AE = 0.65 × $5 million + 0.35 × $5 million × 0.65

AE = $4,387,500

Compute EL for both loans.

EL1  = AE × EDF × LGD 

  = $4,387,500 × (0.01) × (0.75) 

  = $32,906 

EL2  = AE × EDF × LGD 

  = $4,387,500 × (0.01) × (0.75) 

  = $32,906 

Compute ELP.

ELP  = $32,906 + $32,906

ELP = $65,813 (rounded) 

2、Bank X has two equal-sized and maturity loans of $5,000,000 each. The drawdowns on both loans are 65% and expected drawdown given default is also 65%. Both loans fall in the same risk class with a 1% probability of default and 75% loss given default. The remainder of the relevant loan information is summarized below:

Unexpected loss for the portfolio is closest to:

A)    $200,000.

B)    $127,000

C)   $240,000.

D)   $272,000.

The correct answer is B

AE = OS + (COM - OS) × UGD

AE = 0.65 × $5 million + 0.35 × $5 million × 0.65

AE = $4,387,500

Compute UL for both loans.

Compute ULP.