Skip to content

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

A risk manager compares industry credit portfolio models. Which statement correctly describes the CreditMetrics approach to measuring portfolio credit risk?

CreditMetrics uses rating transition probabilities together with a Merton-type asset-value framework, where correlated asset returns drive migrations. The portfolio is revalued at the risk horizon, capturing both default and migration losses. The Poisson and gamma description belongs to CreditRisk+.

  1. AIt models default as a Poisson process driven by common macroeconomic factors with gamma-distributed risk factors
  2. BIt uses rating transition probabilities and an asset-value (Merton-type) framework with correlated asset returns to value the portfolio at the risk horizonCorrect
  3. CIt applies a reduced-form hazard rate calibrated solely to bond spreads with no correlation input
  4. DIt relies on historical portfolio loss data to extrapolate loss distribution without any modeling of individual obligors

Explanation

CreditMetrics is a mark-to-market, migration-based model. Obligor rating changes are driven by correlated asset returns in a Merton-type framework, and the portfolio is revalued at the horizon. The Poisson/gamma description fits CreditRisk+, not CreditMetrics.

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