FRM Part II · FRM Exam Part II · Credit Risk Management
A risk manager computes the Herfindahl-Hirschman Index for a loan portfolio using exposure shares of 40%, 30%, 20% and 10% across four borrowers. What is the HHI, and what is the equivalent number of equally sized exposures?
The HHI is 0.30, the sum of squared shares (0.16+0.09+0.04+0.01). The effective number of equal-sized exposures is 1/0.30, about 3.3, which is below four because the largest borrower dominates the portfolio.
- A0.30; about 3.3 exposuresCorrect
- B0.25; 4 exposures
- C0.30; about 4 exposures
- D0.20; 5 exposures
Explanation
HHI is the sum of squared shares: 0.16 + 0.09 + 0.04 + 0.01 = 0.30. The equivalent number of equal exposures is 1/HHI = 3.33. The 0.25 option is the value for four equal exposures, which ignores the uneven shares.
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