Consider Two Firms with One-Year Probabilities of Default Of $p _ { 1 } = 0.10$

question 4

Multiple Choice

Consider two firms with one-year probabilities of default of $p _ { 1 } = 0.10$ and $p _ { 2 } = 0.05$ , respectively. The correlation of default of the two firms is $\rho = 0.5$ . What is the conditional probability of default $\operatorname { Pr } \left[ D _ { 2 } \mid D _ { 1 } \right]$ ?

• A) 0.38
• B) 0.42
• C) 0.46
• D) 0.50

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