Skip to content

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

A bank's credit portfolio has a standalone unexpected loss (UL) of 40 for Loan A (exposure 400) and 30 for Loan B. The portfolio UL is 55. Loan A has a contribution to portfolio UL of 36. What is Loan B's risk contribution, and what does it show?

Loan B's risk contribution is 19, since contributions must sum to the portfolio unexpected loss of 55 (55 minus 36). Compared with its standalone UL of 30, B benefits from diversification of 11. The other values break the additivity property.

  1. A19, showing that contributions sum to portfolio UL and B's diversification benefit is 11Correct
  2. B15, showing contributions are half of standalone UL
  3. C25, showing B's contribution is standalone UL minus 5
  4. D30, showing B has no diversification benefit

Explanation

Risk contributions sum to portfolio UL: 55 − 36 = 19. Loan B's standalone UL is 30, so its diversification benefit is 30 − 19 = 11. The other options do not satisfy the additivity of contributions.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Credit Risk shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio Credit RiskFree diagnostic mock

More Portfolio Credit Risk questions