FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management
A bank's unsecured personal loan portfolio has 20,000 accounts, each with an exposure at default of $5,000. The one-year probability of default is 3% and the loss given default is 70%. What is the expected loss for the portfolio over one year?
Expected loss is $2.1 million. Total exposure is $100 million, and multiplying by the 3% default probability and 70% loss given default gives $2.1 million. Ignoring LGD would overstate the loss at $3 million.
- A$2.1 millionCorrect
- B$3.0 million
- C$2.1 thousand
- D$4.3 million
Explanation
Total exposure = 20,000 x $5,000 = $100 million. EL = 100m x 3% x 70% = $2.1 million. The $3.0 million figure ignores LGD and treats the whole exposure as lost on default.
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