Groundlearn / Glossary / Expected loss
Expected loss (EL)
Also called EL. A FRM term, defined in plain English with the distinction examiners test.
What it means
The average credit loss anticipated over a horizon.
EL = PD × LGD × EAD
The exam angle
Covered by provisions and priced into the spread. Capital exists for unexpected loss — the variation around this mean — not for this.
Where it appears in the syllabus
- Credit Risk Measurement & ManagementFRM Part II · exam weight 20% · Merton and reduced-form models, credit VaR, counterparty risk, CVA, CDOs.
- Foundations of Risk ManagementFRM Part I · exam weight 20% · Risk taxonomy, governance, CAPM, multifactor models, financial disasters.
Related terms
- Adverse selectionThe problem that arises when the party with better information self-selects into a transaction, leaving the…
- CollateralAssets pledged to secure an exposure, reducing loss if the counterparty defaults.
- Counterparty credit riskThe risk that the other side of a derivative defaults before settling, when the contract has positive value to you.
- Credit default swapA contract in which the buyer pays a periodic premium and receives compensation if a specified borrower suffers a…
- Credit spreadThe extra yield a borrower pays over a risk-free benchmark of the same maturity, compensating for default and…
- Credit valuation adjustmentThe reduction in a derivative’s value to reflect the possibility that the counterparty defaults.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
Practise it in Cornerstone
Snapshot cards and five-question sessions for CFA® and FRM® candidates, free on Android and offline. The full glossary is in the app too, with search.
About CornerstoneOr get a free practice question every day on the Cornerstone WhatsApp channel.