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Explanation:
Statement C is inaccurate. The first partial derivative of the portfolio's unexpected loss with respect to the position's weight (or size) is the Marginal Unexpected Loss, not the Unexpected Loss Contribution (ULC).
The Unexpected Loss Contribution (ULC) is defined as the product of the position's weight and its marginal unexpected loss (i.e., ). This relies on Euler's theorem for capital allocation.
The other statements are correct:
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920.2. Consider a credit portfolio that includes many loans. In order to derive economic capital (EC) for credit risk, we need to quantify four measures: expected losses (EL), unexpected losses, unexpected loss contribution (ULC), and economic capital (EC). In regard to these four measures, each of the following definitions or descriptions is true EXCEPT, which is inaccurate?
A
Expected losses (EL) can be viewed as payments to an insurance pool, do not itself constitute risk, and are reimbursed through adequate loan pricing
B
Unexpected losses (UL) is the standard deviation of credit losses around the expected loss average
C
Unexpected loss contribution (ULC) is the first partial derivative of the portfolio's unexpected loss (portfolio UL) with respect to the position's weight, w(i)
D
Economic capital (EC) for credit risk is the difference between the expected outcome and the unexpected, negative outcome at a certain confidence level