4. Which ofthe following is a denition of loss given default (LGD)? A. Expected losses on a bond exposed to default risk. B. The equity lost when a borrower defaults. C. L6!) = 1 Recovery Rate D. 'Loan payments that a consumer will not make on time. 5. A risk-averse investor expects a return higher than the risk free rate if he makes a risky investment. Which of the following describes a risk-neutral investor? A. A risk-neutral investor will accept a return below the risk-free rate, depending upon the safety of the investment. B. A risk-neutral investor only considers the expected return. c. A riskneutral investor doesn't consider risk when making an investment. D. A risk-neutral investor will require a higher return than a risk-averse investor for the same investment. 6. A Binomial Mixture Model can be used to model the default correlations between obligors in a portfolio. If your portfolio contains many different types of mortgages can you reliably use the Binomial Mixture Model with uniform default probability and uniform default correlation? A. No, because Binomial Mixture Models are not suitable for mortgage portfolios. B. No. because Binomial Mixture Models should use ajoint probability distribution function appropriate for the portfolio of borrowers. C. Yes, because Binomial Mixture Models are good for portfolios with a mixture of borrowers. D. Yes, because Binomial Mixture Models treat obligors as independently binomially distributed, regardless of the joint probability distribution function used