Skip to content

FRM Part II · FRM Exam Part II · Credit Value at Risk

A risk analyst compares the loss distribution of a loan portfolio with that of a portfolio of equally sized equity positions. Which feature best describes the credit portfolio loss distribution relative to the equity return distribution?

Credit portfolio losses are highly skewed with a long right tail. Gains are capped at contractual payments while default losses can be large, and default correlation fattens the tail. Normal or symmetric assumptions therefore understate extreme credit losses.

  1. AIt is roughly symmetric, with thin tails
  2. BIt is highly skewed, with a long right tail of large losses and a limited upsideCorrect
  3. CIt is uniform between zero and the total exposure
  4. DIt is normal, because many independent loans are held

Explanation

Credit returns are capped at the contractual interest and principal, while default losses can be large. This gives a skewed loss distribution with a fat right tail. Symmetric or normal assumptions understate the tail, particularly when defaults are correlated.

Did you get it right without looking?

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

Practise Credit Value at RiskFree diagnostic mock

More Credit Value at Risk questions