Ultimate access to all questions.
Explanation:
The correct answer is C.
When the default correlation in a portfolio of credits is equal to 1.0, it implies that the defaults are perfectly correlated. This means that if one credit defaults, all the others will also default. In such a scenario, there are no diversification benefits, and the portfolio behaves as if it consisted of just one credit. This is because the risk of the portfolio is not spread across multiple credits, but is concentrated in one credit. Therefore, the portfolio's risk is equivalent to the risk of a single credit. This is a critical concept in credit risk management, as diversification is a key strategy used to manage and mitigate risk. However, in this case, diversification is not possible due to the perfect correlation of defaults.
Choice A is incorrect. The statement is false because the default correlation of 1 implies that (explanation truncated in text).
No comments yet.
Q.4366 A firm owns a portfolio of credits that exhibit a default correlation of 1. In this case,
A
The number of defaults is a binomially distributed variable with because there is no correlation other firms in the portfolio
B
The number of defaults is Poisson distributed with a mean of 1 per unit time
C
The portfolio behaves as if it consisted of just one credit
D
Significant credit diversification may be achieved