John Clayburn is trying to parameterize a credit risk model for his employer, Syacmoor Bank. Based on a large sample of loans, he has estimated a default frequency of 12%. John knows that this is a necessary input to calculate the unexpected loss. Which of the following is closest to the standard deviation of Sycamoor’s default frequency?
　　A. 88%.
　　B. 12%.
　　C. 11%.
　　D. 35%.
　　Answer:D
　　The standard default model assumes a two-state (binary) default process. Therefore, the variance = EDF × (1 ? EDF) = (0.12) × (1 ? 0.12) = 0.1056. Thus, standard deviation of default frequency (0.1056)0.5 = 0.32496.