medium · FRM Part 1 Valuation and Risk Models
An analyst is assessing the 'Unexpected Loss' (UL) of a credit portfolio.
If the probability of default (PD) and loss given default (LGD) are estimated correctly, why does UL still pose a threat to the firm's solvency?
- It violates the monotonicity principle of risk measures
- By definition, it is not provisioned for in advance
- It is always priced into the credit spread
- It is a linear function of the risk-free rate
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