The Expected Loss (EL) for each loan is calculated as

$$\text{EL} = \text{EA} * \text{PD} * \text{LGD}$$

Thus for Loan A, the expected loss is

\`$800`,000 * 1.2\% * 40\% = \`$3`,840

For Loan B, the expected loss is

\`$1`,200,000 * 0.8\% * 50\% = \`$4`,800

The total expected loss for the portfolio is the sum of individual expected losses, which is

\`$3`,840 + \`$4`,800 = \`$8`,640

Things to Remember

• The Expected Loss (EL) is the average credit loss expected from an exposure over a given period, calculated as EL = EA * PD * LGD.
• For a portfolio, the expected loss is the sum of the expected losses of its individual components.
• When dealing with financial risk calculations, precision is key, and ensuring that all plausible answer choices are derived from the correct formulas is critical for proper assessment and decision-making.