Two Firms That Have Zero Default Correlation and Expected Losses

question 2

Multiple Choice

Two firms that have zero default correlation and expected losses conditional on default of $2 million and $3 million, respectively. The probability of loss of the two firms in one year is 0.10 and 0.05, respectively. What is the mean loss of this portfolio?

• A) $250,000
• B) $350,000
• C) $400,000
• D) $500,000

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Definitions:

Contract Language

The specific wording and terms used in a contract that determine the rights, obligations, and conditions for all parties involved.

Prior Incidents

prior incidents refer to events or situations that have happened in the past, often used as reference points in decision-making or assessing risk.

Arbitration

A form of alternative dispute resolution where a neutral third party, the arbitrator, makes a decision to resolve a dispute, often used in labor disputes to avoid court litigation.

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A proceeding before a judge or judicial officer in which legal issues, evidences, and arguments are presented to determine a solution to a legal dispute.