Answer: declines as the recovery rate rises.

The expected loss for a debt instrument is calculated as the product of the default probability and the loss severity given default, where loss severity is often expressed as (1 - Recovery rate). Therefore, the expected loss can be rewritten as: **Expected Loss = Default Probability × (1 - Recovery Rate)** This formula demonstrates that as the recovery rate increases, the term (1 - Recovery Rate) decreases, leading to a lower expected loss. Conversely, a lower recovery rate results in a higher expected loss. Thus, the correct answer is **B**, as the expected loss declines with a rising recovery rate. Options **A** and **C** are incorrect because the expected loss is indeed influenced by the recovery rate and does not vary proportionally with it.

Author: LeetQuiz Editorial Team