Standard Deviation of Credit Losses

[dtammerz]

Hello,

in the BT Notes VRM Ch.6 (Credit Risk) p.17, in both the common standard deviation of loss as well as the ratio of portfolio standard deviation to the size of the portfolio, why does L=1? Is it always 1?

 

[emilioalzamora1]

Hi @dtammerz,

"L" in this case denotes the principal amount of the loan. For simplicity it is assumed 1; L = 1 in this case. L = 1 Million.

Hope this helps!

 

[dtammerz]

Hi @dtammerz,

"L" in this case denotes the principal amount of the loan. For simplicity it is assumed 1; L = 1 in this case. L = 1 Million.

Hope this helps!

Thanks so much. This is helpful indeed.