Which of the following statements about the calculation of unexpected loss is CORRECT?
A. Loss given default follows a binomial distribution.
B. Expected loss follows a normal distribution.
C. Unexpected loss follows a normal distribution.
D. Expected default frequency follows a binomial distribution.
Answer:D
For convenience, we may model expected and unexpected losses as following a normal distribution but it is not required. Loss given default is extremely hard to parameterize and cannot be adequately represented by a binomial distribution.