Under the CreditPortfolio View approach to credit risk modeling, which of the following best describes the conditional transition matrix:

Under the CreditPortfolio View approach to credit risk modeling, which of the following best describes the conditional transition matrix:
A . The conditional transition matrix is the unconditional transition matrix adjusted for the state of the economy and other macro economic factors being modeled
B . The conditional transition matrix is the transition matrix adjusted for the risk horizon being different from that of the transition matrix
C . The conditional transition matrix is the unconditional transition matrix adjusted for probabilities of defaults
D . The conditional transition matrix is the transition matrix adjusted for the distribution of the firms’ asset returns

View Answer

Answer: A

Explanation:

Under the CreditPortfolio View approach, the credit rating transition matrix is adjusted for the state of the economy in a way as to increase the probability of defaults when the economy is not doing well, and vice versa. Therefore Choice ‘a’ is the correct answer. The other choices represent nonsensical options.