QUANTS

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

QUANTS

Postby anbu.edu » Sun Oct 06, 2013 7:37 am

You work for a bank that lends to lots of different companies. Your boss asks you to quantify the impact of diversifying credit risk across industries. Which statement is true?
Choose one answer.
a. The dollar standard deviation of a loan portfolio goes down as the number of loans in the portfolio goes up, as long as the loans are independent of each other. Correct
b. The dollar standard deviation of a loan portfolio does not depend on correlation among the loans. Incorrect
c. The dollar standard deviation of a loan portfolio goes down as the number of loans in the portfolio goes up, as long as the loans are positively correlated with each other. Incorrect
d. The dollar standard deviation of a loan portfolio goes down as the number of loans in the portfolio goes up, as long as the loans are negatively correlated with each other.


My question is why D is not correct.. Negative correlation does decrease Risk

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

QUANTS

Postby pradeeppdy » Sat Oct 12, 2013 9:15 am

Please read the statement properly. In D statement said as long as the loans are negatively correlated with each other which is not necessary.
Yes negative correlation does decrease risk.


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