Estimate of expected loss on the portfolio

A portfolio consists of two (long) assets £100 million each. The probability of default over the next year is 10% for the first asset, 20% for the second asset, and the joint probability of default is 3%. Estimate the expected loss on this portfolio due to credit defaults over the next year assuming zero recovery rate.

Answer to this question is £32million. I don't understand how it is computed? What is the logic behind this answer?

Would any quant finance analyst of Brilliant.org explain it?

Answer:- There are two events. Event 1) First asset defaults over the next year. Event 2) Second asset defaults over the next year. Total worth of portfolio is £200 million.

The probability that the first asset defaults over the next year is 10% of £100 million= £10million. ...(1)

The probability that the second asset defaults over the next year is 20% of £100 million= £20 million....(2)

The joint probability of both these events occurring simultaneously over the next year is 3% of £200 million= £6million....(3).

But it include the probability of both the events occuring jointly and independently =2%of £200 million= £4 million....(4). which should be deducted from (1)+(2)+(3)= £36million. So (1)+(2)+(3)-(4)= £32 million

Markdown

Appears as

*italics* or _italics_

italics

**bold** or __bold__

bold


- bulleted
- list

bulleted
list


1. numbered
2. list

numbered
list

Note: you must add a full line of space before and after lists for them to show up correctly

paragraph 1

paragraph 2

paragraph 1

paragraph 2

[example link](https://brilliant.org)

example link

> This is a quote

This is a quote

    # I indented these lines
    # 4 spaces, and now they show
    # up as a code block.

    print "hello world"

# I indented these lines
# 4 spaces, and now they show
# up as a code block.

print "hello world"

Math

Appears as

Remember to wrap math in $ ... $ or \[ ... \] to ensure proper formatting.

2 \times 3

2 \times 3

2^{34}

2^{34}

a_{i-1}

a_{i-1}

\frac{2}{3}

\frac{2}{3}

\sqrt{2}

\sqrt{2}

\sum_{i=1}^3

\sum_{i=1}^3

\sin \theta

\sin \theta

\boxed{123}

\boxed{123}

Easy Math Editor

This discussion board is a place to discuss our Daily Challenges and the math and science related to those challenges. Explanations are more than just a solution — they should explain the steps and thinking strategies that you used to obtain the solution. Comments should further the discussion of math and science.

When posting on Brilliant:

Use the emojis to react to an explanation, whether you're congratulating a job well done , or just really confused .
Ask specific questions about the challenge or the steps in somebody's explanation. Well-posed questions can add a lot to the discussion, but posting "I don't understand!" doesn't help anyone.
Try to contribute something new to the discussion, whether it is an extension, generalization or other idea related to the challenge.
Stay on topic — we're all here to learn more about math and science, not to hear about your favorite get-rich-quick scheme or current world events.

Markdown	Appears as
`italics` or `_italics_`	italics
`bold` or `__bold__`	bold
- bulleted - list	bulleted list
1. numbered 2. list	numbered list
Note: you must add a full line of space before and after lists for them to show up correctly
paragraph 1 paragraph 2	paragraph 1 paragraph 2
`[example link](https://brilliant.org)`	example link
`> This is a quote`	This is a quote
# I indented these lines # 4 spaces, and now they show # up as a code block. print "hello world"	# I indented these lines # 4 spaces, and now they show # up as a code block. print "hello world"

Math	Appears as
Remember to wrap math in `$` ... `$` or `\[` ... `\]` to ensure proper formatting.
`2 \times 3`	$2 \times 3$
`2^{34}`	$2^{34}$
`a_{i-1}`	$a_{i-1}$
`\frac{2}{3}`	$\frac{2}{3}$
`\sqrt{2}`	$\sqrt{2}$
`\sum_{i=1}^3`	$\sum_{i=1}^3$
`\sin \theta`	$\sin \theta$
`\boxed{123}`	$\boxed{123}$

Comments

There are no comments in this discussion.

Math	Appears as
Remember to wrap math in `\(` ... `\)` or `\[` ... `\]` to ensure proper formatting.
`2 \times 3`	$2 \times 3$
`2^{34}`	$2^{34}$
`a_{i-1}`	$a_{i-1}$
`\frac{2}{3}`	$\frac{2}{3}$
`\sqrt{2}`	$\sqrt{2}$
`\sum_{i=1}^3`	$\sum_{i=1}^3$
`\sin \theta`	$\sin \theta$
`\boxed{123}`	$\boxed{123}$