Which one of the following four statements regarding bank’s exposure to credit and default risk is INCORRECT?

Which one of the following four statements regarding bank’s exposure to credit and default risk is INCORRECT?
A . The more the bank diversifies its credit portfolio, the better spread its credit risks become.
B . In debt management, the value of any loan exposure will change typically in a fashion similar the same way that an equity investment can.
C . In debt management, the goal is to minimize the effect of any defaults.
D . Default risk cannot be hedged away fully, and it will always exist for the holder of the credit or for the
person insuring against the credit or default event.

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Answer: B

Explanation:

While diversifying a bank’s credit portfolio helps spread out credit risks, the goal in debt management is to minimize the impact of defaults, and default risk cannot be fully hedged away, meaning it will always exist for the credit holder or the person insuring against it.

However, it is incorrect to state that the value of loan exposure changes similarly to equity investments.

Loan exposures are generally less volatile compared to equities, and their value is typically more stable.

References:

How Finance Works: "Debt management aims to minimize the effect of any defaults and while diversifying the credit portfolio helps, default risk cannot be fully hedged away." .