6. What are the components of the KMV Portfolio Manager Model ? Solution Components of KMV portfolio Manager Model are ; Ri= AISi-E(Li)=AISi-[EDFi*LGDi] Std Dev i= ULi=Std dev di*LGDi=[EDFi(1-EDFi)]^1/2*LGDi Where AIS =Annual all in spread on a loan= (annual fees earned )+( Loan rate-cost of fund) E(L)= Expected loss on the loan EDF=Expected default frequency LGD =Loss given default UL= Unexpected Loss is a measure of Loan risk Std dev i. It is equal to the volatility of the default rate of the loan std dev di multiplied by LGD. it is also equal to the square root of the product of probability of default and 1- probability of default Correlation coeffeicicent ij= correlation between systematic return componenets of equity return of borrower i & j..