18 Questions
What is the standard deviation for the first loan?
28
What is the average return expected on the first loan?
15%
What is the weightage of Loan 2 in the portfolio?
40%
What happens to the risk when Loan 3 is added to the portfolio?
It decreases
What is the average return on the portfolio after adding Loan 3?
18.2%
What is the lesson learned from diversifying the portfolio?
Diversification results in a better return and lower credit risk
Why do the β values in Altman's Z-Score need to be re-computed periodically?
Because they may not remain constant over time
What is a limitation of Altman's Z-Score model?
It does not include industry cycles and market conditions
What is not included in the models built using accounting ratios?
All of the above
What concept is the Moody's KMV Model based on?
Options developed by Merton, Black, and Scholes
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
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
What is the primary purpose of credit risk assessment models?
To determine the prospective borrower's probability of default
What statistical method is used to determine the weights or β values associated with each variable?
OLS Regression
What is the equation used to arrive at the Z-Score for a particular firm?
Altman's Z-Score equation
What is the limitation of Altman's Z-Score?
It is only a quantitative indicator of risk
What is the data source used to determine the weights or β values?
A large population of public listed companies
What is the limitation of using past data in credit risk assessment models?
It may not be the best method to assess future risk
This quiz covers credit risk assessment models, including the Altman Z-Score and Moody's KMV Model, discussing their limitations and factors that affect their accuracy.
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