#### wrongsaidfred

##### Member

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