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Credit Risk Assessment Models

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Questions and Answers

What is the standard deviation for the first loan?

28 (correct)

23.43

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?

It decreases Signup and view all the answers

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

18.2% Signup and view all the answers

What is the lesson learned from diversifying the portfolio?

Diversification results in a better return and lower credit risk Signup and view all the answers

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

Because they may not remain constant over time Signup and view all the answers

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

It does not include industry cycles and market conditions Signup and view all the answers

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

All of the above Signup and view all the answers

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

Options developed by Merton, Black, and Scholes Signup and view all the answers

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

The firm has the option to default on its debt repayment 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?

Their equity holding in the firm Signup and view all the answers

What is the primary purpose of credit risk assessment models?

To determine the prospective borrower's probability of default Signup and view all the answers

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

OLS Regression Signup and view all the answers

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

Altman's Z-Score equation Signup and view all the answers

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

It is only a quantitative indicator of risk Signup and view all the answers

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

A large population of public listed companies Signup and view all the answers

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

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