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FRM Part II · FRM Exam Part II · Portfolio Credit Risk

A bank compares KMV Portfolio Manager with CreditMetrics. Which difference is most accurate?

KMV derives obligor-specific expected default frequencies from equity prices and leverage using a Merton-type structural model, while CreditMetrics typically relies on historical rating transition matrices. Both use correlated asset returns, and neither is the actuarial Poisson approach, which is CreditRisk+.

  1. AKMV uses equity-market-based expected default frequencies (EDFs) from a structural model, whereas CreditMetrics typically uses historical rating transition matricesCorrect
  2. BKMV ignores asset correlation, whereas CreditMetrics requires it
  3. CKMV is an actuarial Poisson model, whereas CreditMetrics is a structural model
  4. DKMV measures only expected loss, whereas CreditMetrics measures only unexpected loss

Explanation

KMV derives obligor-specific EDFs from equity prices and leverage via a Merton-type structural model, so default probabilities change continuously. CreditMetrics uses discrete rating categories and historical transition probabilities. Both use correlated asset values, and neither is a Poisson model.

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