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Hi David,

There seems to be an inconsistency in the way EC is calculated.

From your explanation, and the explanation in the reading, the unexpected loss is one sigma (or a multiple of sigmas) AWAY from the expected value of the portfolio, which should be the value of the portfolio minus the expected loss. Lets assume 95%, sigma of $30,000 and 2 sigmas. This would mean that if the expected loss is $5,000 and the unexpected loss is $60,000, then the total loss we would have to account for would be $65,000 (or $5,000 + 2*$30,000). $5,000 in loan loss reserve and an ADDITIONAL $60,000 for the unexpected loss. In your diagram (slide 27 of video 4e) you also say that the VaR is just this 2*sigma. According to the formula you have on slide 27, EC should be $60,000-$5,000=$55,000.

There is an inconsistency somewhere and I was hoping you could point out where it is.

Thanks in advance for your help.

Mike

There seems to be an inconsistency in the way EC is calculated.

From your explanation, and the explanation in the reading, the unexpected loss is one sigma (or a multiple of sigmas) AWAY from the expected value of the portfolio, which should be the value of the portfolio minus the expected loss. Lets assume 95%, sigma of $30,000 and 2 sigmas. This would mean that if the expected loss is $5,000 and the unexpected loss is $60,000, then the total loss we would have to account for would be $65,000 (or $5,000 + 2*$30,000). $5,000 in loan loss reserve and an ADDITIONAL $60,000 for the unexpected loss. In your diagram (slide 27 of video 4e) you also say that the VaR is just this 2*sigma. According to the formula you have on slide 27, EC should be $60,000-$5,000=$55,000.

There is an inconsistency somewhere and I was hoping you could point out where it is.

Thanks in advance for your help.

Mike

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