Deal of The Day! Hurry Up, Grab the Special Discount - Save 25% - Ends In 00:00:00 Coupon code: SAVE25
Welcome to Pass4Success

- Free Preparation Discussions

PRMIA Exam 8010 Topic 2 Question 63 Discussion

Actual exam question for PRMIA's 8010 exam
Question #: 63
Topic #: 2
[All 8010 Questions]

If the odds of default are 1:5, what is the probability of default?

Show Suggested Answer Hide Answer
Suggested Answer: C

Concentration risk in a credit portfolio arises due to a high degree of correlation between the default probabilities of the issuers of securities in the portfolio. For example, the fortunes of the issuers in the same industry may be highly correlated, and an investor exposed to multiple such borrowers may face 'concentration risk'.

A low degree of correlation, or independence of individual defaults in the portfolio actually reduces or even eliminates concentration risk.

The fact that issuers are from the same country may not necessarily give rise to concentration risk - for example, a bank with all US based borrowers in different industries or with different retail exposure types may not face practically any concentration risk. What really matters is the default correlations between the borrowers, for example a lender exposed to cement producers across the globe may face a high degree of concentration risk.


Contribute your Thoughts:

Goldie
3 hours ago
Okay, let's think this through. If the odds of default are 1:5, that means the probability of default is the number of favorable outcomes (1) divided by the total number of possible outcomes (1 + 5 = 6). So the probability should be 1/6 or 16.67%.
upvoted 0 times
...
Nicholle
8 days ago
I'm not sure, but I think the answer is A) 16.67% as well. It makes sense based on the odds given.
upvoted 0 times
...
Kathryn
9 days ago
I agree with Margret, because the probability is calculated by dividing 1 by the sum of the odds plus 1.
upvoted 0 times
...
Margret
10 days ago
I think the answer is A) 16.67%
upvoted 0 times
...

Save Cancel