For a given loan portfolio, which of the following will NOT increase expected loss?
A. Decrease recovery rate and decrease probability of default.
B. Increase recovery rate and increase probability of default.
C. Decrease recovery rate and increase probability of default.
D. Increase recovery rate and decrease probability of default.
Answer:D
Decreasing the recovery rate and increasing the probability of default will increase expected loss. Decreasing/increasing the recovery rate and decreasing/increasing the probability of default may increase or decrease expected loss depending on the relative change in the factors. Finally, increasing the recovery rate and decreasing the probability of default will unambiguously DECREASE expected loss.