Question 1

Consider the following table with information on the weightings and expected returns of two assets held by an FI. $$\begin{array} { | c | c | c | } 
\hline \text { Loan } i & \text { Weight } i & \text { Expected return } i \
\hline 1 & 0.35 & 12.35 \% \
\hline 2 & 0.65 & 10.25 \% \
\hline
\end{array}$$ What is the expected return on the portfolio (round to two decimals)?

Accepted Answer

To find the expected return on the portfolio, we need to weight the expected returns of each asset by their respective weightings and sum them. This can be calculated as: 
0.35 * 0.1235 + 0.65 * 0.1025 = 0.043225 + 0.066625 = 0.10985 = 10.99%
Therefore, the correct answer is D.

Question 2

Which of the following statements is true?

Accepted Answer

When two industry groups' performances are highly correlated, the risk of simultaneous losses increases, prompting FIs to set a lower aggregate limit to manage risk.

Question 3

Assume that the maximum loss as a percentage of capital is 9% of an FI's capital to a particular sector and that the amount recovered per dollar of defaulted loans in this sector is 70%.What is the concentration limit (round to two decimals)?

Accepted Answer

The concentration limit can be calculated by taking the maximum loss as a percentage of capital (9%) and dividing it by the recovery rate (1 - recovery rate of 70% = 30%). This gives a concentration limit of 30%.

Question 4

Which of the following statements is true?

Accepted Answer

Systematic loan loss risk refers to the risk of loan losses in a specific business sector and how these losses correlate with the overall losses in a financial institution's (FI's) loan portfolio. It is not limited to the comparison between personal and commercial loans or between individual borrowers and the FI's portfolio.

Question 5

Consider the following hypothetical transition matrix:  Which of the following statements is true?

Accepted Answer

The answer of Consider the following hypothetical transition matrix: ...

Question 6

Migration analysis is a method to:

Accepted Answer

Migration analysis is a method to measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines. It helps to identify whether the creditworthiness of borrowers has deteriorated or improved, and to what extent. This information is crucial for banks and financial institutions to manage their credit risk effectively.

Question 7

Which of the following statements is true?

Accepted Answer

The law of large numbers states that the larger the sample size, the more likely the actual outcomes will be close to the expected outcomes. FIs can reduce risk by taking advantage of this law in their investment decisions since they can diversify their portfolios and spread risk across a larger number of investments, reducing the impact of any individual investment on the overall portfolio's performance.

Question 8

Assume that an FI's concentration limit on a particular sector is 15% and that the sector's loss rate is 25%.What is the maximum loss as a percentage of the FI's capital (round to two decimals)?

Accepted Answer

The maximum loss is calculated by multiplying the concentration limit (15%) by the sector's loss rate (25%), resulting in 3.75% of the FI's capital.

Question 9

Assume that the maximum loss as a percentage of capital is 12% of an FI's capital to a particular sector.The FI's concentration limit on this sector 35%.What is the sector's loss rate (round to two decimals)?

Accepted Answer

We can use the formula: Sector Loss Rate = Maximum Loss % / Concentration Limit % 
Substituting the values, we get: Sector Loss Rate = 12% / 35% = 0.3429 or 34.29% 
Therefore, the correct answer is C.

Question 10

Which of the following statements is true?

Accepted Answer

Modern portfolio theory (MPT) emphasizes diversification to reduce risk, and it is the size of the portfolio, not profitability, that allows for diversification when asset returns are imperfectly correlated.

Question 11

Minimum risk portfolio refers to a combination of assets:

Accepted Answer

The minimum risk portfolio is designed to reduce the variance of portfolio returns to the lowest feasible level. This means that it seeks to minimize risk while still achieving a certain return level. It does not seek to completely eliminate risk (answer D) or leverage risk to an optimal level (answer B).

Question 12

Which of the following statements is true?

Accepted Answer

The answer of Which of the following statements is true?
...

Question 13

Assume that the maximum loss as a percentage of capital is 12% of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35%.What is the concentration limit (round to two decimals)?

Accepted Answer

The concentration limit can be calculated as the maximum loss as a percentage of capital divided by the amount lost per dollar of defaulted loans in this sector, which is 12% / 0.35 = 34.29%.

Question 14

The Basel Committee on Banking Supervision considers regulatory loan concentration limits to individual borrowers as an issue of granularity.Which of the following statements is true in this context?

Accepted Answer

The issue of granularity refers to the degree of detail or specificity in the risk measurement and management process. In this context, it means that banks should consider the concentration of their exposures to individual borrowers or sectors in their risk weightings for capital adequacy purposes. If a bank holds a relatively large exposure to a single borrower or sector, they may be required to adjust their risk weightings up or down to reflect the level of concentration or diversification in their portfolio. Option B accurately reflects this concept, while the other options do not.

Question 15

The term 'transition matrix' refers to a matrix that provides a measurement of the probability of a loan:

Accepted Answer

A transition matrix provides probabilities for all of the listed options, including the probability of a loan being upgraded, downgraded, or defaulting over a specific period. Therefore, D is the correct answer.

Question 16

Moody's Analytics is a model that:

Accepted Answer

Moody's Analytics, developed by the KMV Corporation and now owned by Moody's, encompasses models that measure expected returns, risks of loans, and correlations of default risks among borrowers, aiming to estimate an efficient frontier for loans.

Question 17

Which of the following statements is true?

Accepted Answer

The concentration limit on a portfolio can indeed be calculated as the maximum loss as a percentage of capital multiplied by (one divided by the loss rate). This formula helps in determining how much of a portfolio can be concentrated in a particular investment before it exceeds the maximum allowable loss threshold.

Question 18

Limits set on the maximum loan size that can be made to an individual borrower are referred to as:

Accepted Answer

Concentration limits refer to the maximum loan size that can be made to an individual borrower in order to limit the risk associated with having too much exposure to one borrower.

Question 19

Which of the following statements is true?

Accepted Answer

The answer of Which of the following statements is true?
...

Question 20

Consider the following table with information on the weightings and expected returns of three assets held by an FI. $$\begin{array} { | c | c | c | } 
\hline \text { Loan } i & \text { Weight } i & \text { Expected return } i \
\hline 1 & 0.15 & 12.35 \% \
\hline 2 & 0.55 & 10.25 \% \
\hline 3 & 0.30 & 15.75 \% \
\hline
\end{array}$$ What is the expected return on the portfolio (round to two decimals)?

Accepted Answer

The expected return on the portfolio is calculated by multiplying each asset's expected return by its weight in the portfolio and then summing these products.

Quiz 11: Credit Risk II: Loan Portfolio and Concentration Risk

Which of the following statements is true?

Assume that the maximum loss as a percentage of capital is 9% of an FI's capital to a particular sector and that the amount recovered per dollar of defaulted loans in this sector is 70%.What is the concentration limit (round to two decimals) ?

Which of the following statements is true?

Consider the following hypothetical transition matrix: Which of the following statements is true?

Migration analysis is a method to:

Which of the following statements is true?

Assume that an FI's concentration limit on a particular sector is 15% and that the sector's loss rate is 25%.What is the maximum loss as a percentage of the FI's capital (round to two decimals) ?

Assume that the maximum loss as a percentage of capital is 12% of an FI's capital to a particular sector.The FI's concentration limit on this sector 35%.What is the sector's loss rate (round to two decimals) ?

Which of the following statements is true?

Minimum risk portfolio refers to a combination of assets:

Which of the following statements is true?

Assume that the maximum loss as a percentage of capital is 12% of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35%.What is the concentration limit (round to two decimals) ?

The Basel Committee on Banking Supervision considers regulatory loan concentration limits to individual borrowers as an issue of granularity.Which of the following statements is true in this context?

The term 'transition matrix' refers to a matrix that provides a measurement of the probability of a loan:

Moody's Analytics is a model that:

Which of the following statements is true?

Limits set on the maximum loan size that can be made to an individual borrower are referred to as:

Which of the following statements is true?