## Value at risk

mayankmundhra30
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Joined: Sat Jun 25, 2016 8:13 am

### Value at risk

1) Which of the following loans has the lowest credit risk? The table data file is attached. It was asked in the quiz.Please explain
Question 8
a. Loan A Incorrect
b. Loan B Incorrect
c. Loan C Correct
d. Loan D Incorrect
The correct answer is C
The 1 year probability of default needs to be adjusted to the remaining term using the formula [(1-d_month)12 = (1-d_annual)]. We multiply the monthly PD with the loss given default (LGD) to get the expected percentage loss (EL%):

2) Suppose you are a portfolio manager and your supervisor have asked you to examine some of the features of a two-asset credit portfolio, consisting of two correlated credits, credit X and credit Y, let the following notation be given:
•RCX, RCY is the risk contribution of credit X and credit Y, respectively.
•ELXY, ELX, ELY is the expected loss of a portfolio consisting of credits X and Y, credit X, and credit Y, respectively.
•ULXY, ULX, ULY is the unexpected loss of a portfolio consisting of credits X and Y, credit X, and credit Y, respectively.
Using the notation above and assuming that the two assets’ defaults are correlated, which of the following equations is correct?
a. ELXY = ELX + ELY Correct
b. ULXY = ULX + ULY Incorrect
c. ULXY > RCX + RCY Incorrect
d. RCX + RCY > ULX + ULY Incorrect

3) Suppose you are a Risk manager in your firm and after evaluating the results of stress testing, you are recommending that the firm allocate additional economic capital and purchase selective insurance protection to guard against particular events. In order to give management a fully informed assessment, what is important that relates to this strategy?
a. While decreasing Liquidity Risk exposure, it will likely increase market risk exposure Incorrect
b. While decreasing correlation risk exposure, it will likely increase credit risk exposure Incorrect
c. While decreasing market risk exposure, it will likely increase credit risk exposure Correct
d. While decreasing credit risk exposure, it will likely increase model risk exposure Incorrect
The correct answer is C
‘C’ is correct, as it is related to the strategy. Why B is incorrect
Incorrect
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