Two firms that have zero default correlation and expected losses conditional on default of $2 million and $3 million, respectively. The probability of loss of the two firms in one year is 0.10 and 0.05, respectively. What is the mean loss of this portfolio?
A) $250,000
B) $350,000
C) $400,000
D) $500,000

Question

Two firms that have zero default correlation and expected losses conditional on default of $2 million and $3 million, respectively. The probability of loss of the two firms in one year is 0.10 and 0.05, respectively. What is the mean loss of this portfolio? 
A) $250,000
B) $350,000
C) $400,000
D) $500,000

Quizplus · Accepted Answer

The mean loss of the portfolio is calculated by multiplying the expected loss conditional on default by the probability of loss for each firm and then summing these products. For the first firm, this is $2 million * 0.10 = $200,000. For the second firm, it is $3 million * 0.05 = $150,000. Adding these together gives a total mean loss of $350,000.

Two Firms That Have Zero Default Correlation and Expected Losses