Financial Risk Manager Part 1

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Explanation:

A is correct. Expected loss is calculated as:

\text{Probability of default} \times (1 - \text{Recovery rate})

Therefore:

\text{Recovery rate} = 1 - (\text{Expected loss rate} / \text{Probability of default}) \\ = 1 - (4.62\% / 6.79\%) = 31.9588\%

B is incorrect. This is PD/EL − 1.

C is incorrect. This is EL/PD (which equals the loss given default).

D is incorrect. This is $1 - \text{EL} - \text{PD}$.

Learning Objective: Define recovery rate and calculate the expected loss from a loan.

Explanation:

A is correct. Expected loss is calculated as:

\text{Probability of default} \times (1 - \text{Recovery rate})

Therefore:

\text{Recovery rate} = 1 - (\text{Expected loss rate} / \text{Probability of default}) \\ = 1 - (4.62\% / 6.79\%) = 31.9588\%

B is incorrect. This is PD/EL − 1.

C is incorrect. This is EL/PD (which equals the loss given default).

D is incorrect. This is $1 - \text{EL} - \text{PD}$.

Learning Objective: Define recovery rate and calculate the expected loss from a loan.

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Last updated: July 10, 2026 at 05:44

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