Probability of Loss on Loan Portfolio
by Oldrich Vasicek of KMV Corp.
February 12, 1987
Opening Paragraph: Consider a portfolio consisting of n loans in equal dollar amounts. Let the probability of default on any one loan be p, and assume that the values of the borrowing companies' assets are correlated with a coefficient ρ for any two companies. We wish to calculate the probability distribution of the percentage gross loss L on the portfolio, that is,