FRM II-CR 7

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FRM II-CR 7

Postby anbu.edu » Tue Aug 12, 2014 8:22 pm

Assuming a specific value for the market parameter, which of the following is an implication of the single-factor
model for assessing the impact of varying default correlations based on a credit position’s beta?
A) If the market parameter and beta have values that do not equal one, then the conditional probability of
default will be greater than the unconditional probability of default .
B) The unconditional standard deviation of 1 > the conditional standard deviation [√(1 - β2)].
C)Individual asset returns and idiosyncratic shocks are not independent from other firm’s shocks and
returns.
D) As the market factor goes from weak to strong economies, a smaller idiosyncratic shock will trigger

The answer is B.. I didn't get any explanation for it, so can anyone explain this
Source Schweser

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