With a portfolio that consists of 20 well-diversified A-rated
bonds and assuming a default probability of 1% per annum, what is the
approximate probability of sustaining no losses on the portfolio over the next
12 months?

(a)0.82
(b) 0.8 (c) 0.85
(d) 0.99

Solution follows here:

__Solution:__
Default Probability (per annum) of each portfolio= 1% = 0.01

=> Probability of sustaining no losses (per annum) of each
portfolio = (1-0.01) = 0.99

Assuming the portfolios to be independent,

Probability of sustaining no losses = P(E) = P(E

_{1})* P(E_{2})* P(E_{3})*..... P(E_{20})
= (0.99)

^{20}= 0.8179 ≈ 0.82**Answer (a)**
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