Suppose that the two assets in a hypothetical loan portfolio have an identical credit risk grade, and hence, same probability of default

(PD) = 2.16%. However, the assets are from two different sectors:

sector auto (A) and sector building materials (B). A study of external risks points out that there is a potential external risk that may impact the portfolio adversely. Hence, there is a risk of downgrade

(or migration risk) of portfolio components if this external event occurs. The volatility risk (standard deviation) in asset A is 5% and unexpected risk (standard deviation) in asset B is 6%. A correlation between both sectors is stated to be 50%. Which combination

(or mix) of asset A and asset B ratio amongst the following options will provide the least risky credit portfolio (or lowest ULp)?

a) 0:100

b) 50:50

c) 60:40

d) 100:0