In the single-factor model, consider two obligors, each with a one-period default probability of 0.0175 (1.75...
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In the single-factor model, consider two obligors, each with a one-period default probability of 0.0175 (1.75 percent) and with a recovery rate of zero. One has a correlation between the firm's asset return and the market factor ẞ= √0.3 and the other has a correlation ẞ = √0.7. What are the shares of systematic (market-related) and idiosyncratic (firm- related) risk of each firm's returns? In the single-factor model, consider two obligors, each with a one-period default probability of 0.0175 (1.75 percent) and with a recovery rate of zero. One has a correlation between the firm's asset return and the market factor ẞ= √0.3 and the other has a correlation ẞ = √0.7. What are the shares of systematic (market-related) and idiosyncratic (firm- related) risk of each firm's returns?
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Solution In the singlefactor model the return of a firm is modeled as a function of the market factor and a firmspecific shock The market factor is assumed to be a random variable that follows a norma... View the full answer
Related Book For
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
Posted Date:
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