2 Portfolio Risk In-Class Activity 10/28/20 3 4 5 6 Assignment: Take the Typical Portfolio below and now change TWO variables: 7 8 1) Asset Deterioration: 1 and 2 stay the same 9 3 drops to 4 10 4 drops to 5 11 5 drops to 6 12 2) Probability of Loss increases: 13 1 0 14 2 0.0030 15 3 0.007 16 4 0.009 17 5 0.015 18 6 0.30 19 20 Part A: Calculate Portfolio Weighted Average Grade and ROA 21 22 Typical Portfolio 23 Net Income Probability Net Income 24 Grade Outstandings Commitments Spread Before of Loss Loss After 25 1 10,000 200,000 0.005 50 0 0 50 26 2 50,000 100,000 0.0125 625 0.0025 125 500 27 3 750,000 1,200,000 0.02 15000 0.005 3750 11250 28 4 400,000 650,000 0.0275 11000 0.0075 3000 8000 29 5 85,000 90,000 0.0325 2762.5 0.01 850 1912.5 30 6 8,000 8,000 0.0475 380 0.25 2000 -1620 31 1,303,000 2,248,000 20,093 32 ROA 0.0154 33 Weighted Average Loan Grade 3.40 34 36 Part B: Think like the Bank's CEO and outline a couple of steps that you might take in this Recession scenario. 2 Portfolio Risk In-Class Activity 10/28/20 3 4 5 6 Assignment: Take the Typical Portfolio below and now change TWO variables: 7 8 1) Asset Deterioration: 1 and 2 stay the same 9 3 drops to 4 10 4 drops to 5 11 5 drops to 6 12 2) Probability of Loss increases: 13 1 0 14 2 0.0030 15 3 0.007 16 4 0.009 17 5 0.015 18 6 0.30 19 20 Part A: Calculate Portfolio Weighted Average Grade and ROA 21 22 Typical Portfolio 23 Net Income Probability Net Income 24 Grade Outstandings Commitments Spread Before of Loss Loss After 25 1 10,000 200,000 0.005 50 0 0 50 26 2 50,000 100,000 0.0125 625 0.0025 125 500 27 3 750,000 1,200,000 0.02 15000 0.005 3750 11250 28 4 400,000 650,000 0.0275 11000 0.0075 3000 8000 29 5 85,000 90,000 0.0325 2762.5 0.01 850 1912.5 30 6 8,000 8,000 0.0475 380 0.25 2000 -1620 31 1,303,000 2,248,000 20,093 32 ROA 0.0154 33 Weighted Average Loan Grade 3.40 34 36 Part B: Think like the Bank's CEO and outline a couple of steps that you might take in this Recession scenario