Credit Risk Assessment Models
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Questions and Answers

What is the standard deviation for the first loan?

  • 28 (correct)
  • 42
  • 23.43
  • 15

    • What is the average return expected on the first loan?

  • 15% (correct)
  • 18.2%
  • 21%
  • 17.4%

    • What is the weightage of Loan 2 in the portfolio?

  • 30%
  • 40% (correct)
  • 50%
  • 60%

    • What happens to the risk when Loan 3 is added to the portfolio?

    <p>It decreases</p> Signup and view all the answers

    What is the average return on the portfolio after adding Loan 3?

    <p>18.2%</p> Signup and view all the answers

    What is the lesson learned from diversifying the portfolio?

    <p>Diversification results in a better return and lower credit risk</p> Signup and view all the answers

    Why do the β values in Altman's Z-Score need to be re-computed periodically?

    <p>Because they may not remain constant over time</p> Signup and view all the answers

    What is a limitation of Altman's Z-Score model?

    <p>It does not include industry cycles and market conditions</p> Signup and view all the answers

    What is not included in the models built using accounting ratios?

    <p>All of the above</p> Signup and view all the answers

    What concept is the Moody's KMV Model based on?

    <p>Options developed by Merton, Black, and Scholes</p> Signup and view all the answers

    What happens when the effective cash flow is less than the debt repayment obligations?

    <p>The firm has the option to default on its debt repayment</p> Signup and view all the answers

    What is the maximum possible loss to the equity shareholders in the scenario where the firm defaults on its debt repayment?

    <p>Their equity holding in the firm</p> Signup and view all the answers

    What is the primary purpose of credit risk assessment models?

    <p>To determine the prospective borrower's probability of default</p> Signup and view all the answers

    What statistical method is used to determine the weights or β values associated with each variable?

    <p>OLS Regression</p> Signup and view all the answers

    What is the equation used to arrive at the Z-Score for a particular firm?

    <p>Altman's Z-Score equation</p> Signup and view all the answers

    What is the limitation of Altman's Z-Score?

    <p>It is only a quantitative indicator of risk</p> Signup and view all the answers

    What is the data source used to determine the weights or β values?

    <p>A large population of public listed companies</p> Signup and view all the answers

    What is the limitation of using past data in credit risk assessment models?

    <p>It may not be the best method to assess future risk</p> Signup and view all the answers

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