EDU mock 2

anbu.edu
Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm

EDU mock 2

Postby anbu.edu » Thu Oct 30, 2014 3:41 pm

Consider a simple two firm credit portfolio with the following probabilities given:
Firm 1 defaults over time horizon t, f1= 0.30
Firm 2 defaults over time horizon t, f2= 0.25
Joint probability that both firms will default over time horizon t, f12 =0.15
What is the probability that at least one firm will default?
Select one:
a. 0.45
b. 0.4
c. 0.55
d. 0.70


CAN you please explain the answer.. i know its simple but i am kinda stuck..please help me why we are doing .3+.25-.15

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

EDU mock 2

Postby edupristine » Fri Oct 31, 2014 5:45 am

Hi anbu.edu,

This follows from set theory.

Basically here, we have to find P (A Union B) = P(A) + P(B) - P(A and B)

Here, P(A union B) is nothing but the probability that atleast one firm wil default,

P(A)= Prob that firm 1 defaults over time horizon t = 0.30

P(B) = Prob that firm 2 defaults over time horizon t = 0.25


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