When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.

When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.
A . Symmetric; less
B . Symmetric; greater
C . Asymmetric; less
D . Asymmetric; greater

View Answer

Answer: D

Explanation:

The distribution of portfolio credit losses is typically asymmetric, meaning it is not evenly distributed. This asymmetry arises because the likelihood of small losses is much higher than the likelihood of very large losses.

The likelihood of total losses, which includes both expected and unexpected losses, is greater than the likelihood of no credit losses. This is because while small losses happen more frequently, large losses, although less frequent, can occur and can be significant.

References:

How Finance Works: "The distribution of credit losses is asymmetric because the likelihood of total losses is greater than the likelihood of no credit losses."