According to GARP, one of the building blocks in risk management is a proper understanding of the difference between expected loss, unexpected loss, and extreme risk; also known as tail risk. In regard to this building block, which of the following statements is TRUE?

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Effective risk management should reduce a credit portfolio's expected loss (EL) to approximately zero.

Expected loss is a product of (i) the probability of the risk event occurring; (ii) the severity of the loss if the risk event occurs, and (iii) the expected recovery rate.

While expected loss (EL) is a function of default correlation, unexpected loss (UL) is NOT influenced by portfolio granularity.

Although banks theoretically do not need to set aside provisions when loan products are accurately priced, in realistic practice, banks should provision for expected losses.

Financial Risk Manager Part 1

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According to GARP, one of the building blocks in risk management is a proper understanding of the difference between expected loss, unexpected loss, and extreme risk; also known as tail risk. In regard to this building block, which of the following statements is TRUE?