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Answer: 32%
## Explanation The expected loss formula is: `Expected Loss = Probability of Default × (1 - Recovery Rate)` Given: - Expected Loss Rate = 4.62% - Probability of Default = 6.79% We can rearrange the formula to solve for Recovery Rate: `Recovery Rate = 1 - (Expected Loss Rate / Probability of Default)` Substituting the values: `Recovery Rate = 1 - (4.62% / 6.79%)` `Recovery Rate = 1 - 0.6804` `Recovery Rate = 0.3196 = 31.96% ≈ 32%` Therefore, the correct recovery rate is **32%**. **Why other options are incorrect:** - **B. 47%**: This would be PD/EL - 1 - **C. 68%**: This is EL/PD (which equals the loss given default) - **D. 89%**: This is 1 - EL - PD
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An internal auditor at a commercial bank is reviewing the risk management department's credit risk calculations relating to a small business loan in the bank's portfolio. The auditor finds the following information in the calculation:
What recovery rate was assumed by the risk management department in calculating the expected loss?
A
32%
B
47%
C
68%
D
89%