Question 1

Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.

Accepted Answer

A) True 
 B)False  False

Question 2

In the past, data availability limited the use of sophisticated portfolio models to set concentration limits.

Accepted Answer

A) True 
 B)False  True

Question 3

If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default?

Accepted Answer

A) 5 percent. 
B) 10 percent. 
C) 15 percent. 
D) 20 percent. 
E) 25 percent. 
A) 5 percent. 
B) 10 percent. 
C) 15 percent. 
D) 20 percent. 
E) 25 percent. B

Question 4

Concentration limits are used to either reduce or increase exposure to specific industries.

Accepted Answer

A) True 
 B)False

Question 5

Under which model does an FI compare its own allocation of loans in any specific area with the national allocations across borrowers to measure the extent to which its loan portfolio deviates from the market portfolio benchmark?

Accepted Answer

A) Credit Metrics. 
B) Credit Risk +. 
C) Loan loss ratio-based model. 
D) Moody's Analytics portfolio manager model. 
E) Loan volume-based model. 
A) Credit Metrics. 
B) Credit Risk +. 
C) Loan loss ratio-based model. 
D) Moody's Analytics portfolio manager model. 
E) Loan volume-based model.

Question 6

A weakness of migration analysis to evaluate credit concentration risk is that the

Accepted Answer

A) information obtained for this analysis is usually ex-post (i.e. after the fact). 
B) information obtained for this analysis is ex-ante (i.e. before the fact). 
C) analysis makes use of historical data classified only by industries. 
D) analysis makes use of historical data classified by individual firms. 
E) migration of firms may only be temporary. 
A) information obtained for this analysis is usually ex-post (i.e. after the fact). 
B) information obtained for this analysis is ex-ante (i.e. before the fact). 
C) analysis makes use of historical data classified only by industries. 
D) analysis makes use of historical data classified by individual firms. 
E) migration of firms may only be temporary.

Question 7

In applying the loan loss ratio models, the loss rate "b" for the whole loan portfolio is

Accepted Answer

A) 0. 
B) 0.5. 
C) 1. 
D) 2. 
E) negative. 
A) 0. 
B) 0.5. 
C) 1. 
D) 2. 
E) negative.

Question 8

According to Moody's Analytics, default correlations tend to be _____ and lie between _______.

Accepted Answer

A) Low; 0.002 and 0.15 
B) High; 1.86 and 2.99 
C) Low; 0.001 and 0.002 
D) High; 2.99 and 3.50 
E) Low; 0 and 0.001 
A) Low; 0.002 and 0.15 
B) High; 1.86 and 2.99 
C) Low; 0.001 and 0.002 
D) High; 2.99 and 3.50 
E) Low; 0 and 0.001

Question 9

Which of the following is a source of loan volume data?

Accepted Answer

A) Commercial bank call reports. 
B) Data on shared national credits. 
C) Commercial databases. 
D) All of these. 
E) Only OSFI has this data. 
A) Commercial bank call reports. 
B) Data on shared national credits. 
C) Commercial databases. 
D) All of these. 
E) Only OSFI has this data.

Question 10

One advantage of portfolio diversification methods is that they are applicable to all FIs, regardless of their size.

Accepted Answer

A) True 
 B)False

Question 11

Matrix Bank has compiled the following migration matrix on consumer loans. Which of the following statements accurately summarizes this data?

Accepted Answer

A) Ten percent of grade two loans were upgraded during the year. 
B) Grade one loans have a higher probability of downgrade than grades two or three. 
C) Grade three loans have a higher probability of upgrade than grade two loans. 
D) Grade three loans have a higher probability of downgrade than grade two loans. 
E) All of these. 
A) Ten percent of grade two loans were upgraded during the year. 
B) Grade one loans have a higher probability of downgrade than grades two or three. 
C) Grade three loans have a higher probability of upgrade than grade two loans. 
D) Grade three loans have a higher probability of downgrade than grade two loans. 
E) All of these.

Question 12

What does Moody's Analytics Portfolio Manager Model use to identify the overall risk of the portfolio?

Accepted Answer

A) Maximum loss as a percent of capital. 
B) Historical loan loss ratios. 
C) Default probability on each loan in a portfolio. 
D) Market value of an asset and the volatility of that asset's price. 
E) Mean of the value of loans in a portfolio. 
A) Maximum loss as a percent of capital. 
B) Historical loan loss ratios. 
C) Default probability on each loan in a portfolio. 
D) Market value of an asset and the volatility of that asset's price. 
E) Mean of the value of loans in a portfolio.

Question 13

A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following EXCEPT

Accepted Answer

A) rating at which the portfolio ended the year. 
B) transition probabilities. 
C) rating at which the portfolio of loans began the year. 
D) future migration expected in the portfolio. 
E) the average proportions of loans that began the year. 
A) rating at which the portfolio ended the year. 
B) transition probabilities. 
C) rating at which the portfolio of loans began the year. 
D) future migration expected in the portfolio. 
E) the average proportions of loans that began the year.

Question 14

The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.

Accepted Answer

A) True 
 B)False

Question 15

In the Moody's Analytics portfolio model, the risk of a loan measures

Accepted Answer

A) the product of the estimated loss given default and risk-free rate on a security of equivalent maturity. 
B) annual all-in-spread minus the loss given default. 
C) annual all-in-spread minus the expected default frequency. 
D) the product of the expected default frequency and the estimated loss given default. 
E) the volatility of the loan's default rate around its expected value times the amount lost given default. 
A) the product of the estimated loss given default and risk-free rate on a security of equivalent maturity. 
B) annual all-in-spread minus the loss given default. 
C) annual all-in-spread minus the expected default frequency. 
D) the product of the expected default frequency and the estimated loss given default. 
E) the volatility of the loan's default rate around its expected value times the amount lost given default.

Question 16

Commercial bank call reports are provided by banks to the U.S. Federal Reserve and are useful in determining the proportion of loans in different classifications for the entire U.S. banking system.

Accepted Answer

A) True 
 B)False

Question 17

Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.

Accepted Answer

A) True 
 B)False

Question 18

In the Moody's Analytics portfolio model, the expected loss on a loan is

Accepted Answer

A) the product of the estimated loss given default and risk-free rate on a security of equivalent maturity. 
B) annual all-in-spread minus the loss given default. 
C) annual all-in-spread minus the expected default frequency. 
D) the product of the expected default frequency and the estimated loss given default. 
E) the volatility of the loan's default rate around its expected value. 
A) the product of the estimated loss given default and risk-free rate on a security of equivalent maturity. 
B) annual all-in-spread minus the loss given default. 
C) annual all-in-spread minus the expected default frequency. 
D) the product of the expected default frequency and the estimated loss given default. 
E) the volatility of the loan's default rate around its expected value.

Question 19

Comparing the loan mix of an individual FI to a national benchmark loan mix is useful in determining the extent that the individual FI may differ from an efficient portfolio composition.

Accepted Answer

A) True 
 B)False

Question 20

Included in the Moody's Analytics model are recovery rates on defaulted loans.

Accepted Answer

A) True 
 B)False

Exam 11: Credit Risk: Loan Portfolio and Concentration Risk

Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.

In the past, data availability limited the use of sophisticated portfolio models to set concentration limits.

If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default?

Concentration limits are used to either reduce or increase exposure to specific industries.

Under which model does an FI compare its own allocation of loans in any specific area with the national allocations across borrowers to measure the extent to which its loan portfolio deviates from the market portfolio benchmark?

A weakness of migration analysis to evaluate credit concentration risk is that the

In applying the loan loss ratio models, the loss rate "b" for the whole loan portfolio is

According to Moody's Analytics, default correlations tend to be _____ and lie between _______.

Which of the following is a source of loan volume data?

One advantage of portfolio diversification methods is that they are applicable to all FIs, regardless of their size.

Matrix Bank has compiled the following migration matrix on consumer loans. Which of the following statements accurately summarizes this data?

What does Moody's Analytics Portfolio Manager Model use to identify the overall risk of the portfolio?

A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following EXCEPT

The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.

In the Moody's Analytics portfolio model, the risk of a loan measures

Commercial bank call reports are provided by banks to the U.S. Federal Reserve and are useful in determining the proportion of loans in different classifications for the entire U.S. banking system.

Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.

In the Moody's Analytics portfolio model, the expected loss on a loan is

Comparing the loan mix of an individual FI to a national benchmark loan mix is useful in determining the extent that the individual FI may differ from an efficient portfolio composition.

Included in the Moody's Analytics model are recovery rates on defaulted loans.

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According to Moody's Analytics, default correlations tend to be _ and lie between ___.