1.Using regression analysis on historical loan losses, a bank has estimated the following:

X C = 0.002 + 0.8 X L and X H = 0.003 + 1.8 X L where : X C = loss rate in the commercial sector X H = loss rate in the consumer ( household )

If the bank’s total loan loss rates increase by 10 per cent, what are the expected loss rate increases in the commercial and consumer sectors?
In which sector should the bank limit its loans, and why? LO 11.4

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sector XL = loss rate for its total loan portfolio. Xc=0.002 + 0.8X, and XH = 0.003 + 1.8X where: Xc = loss rate in the commercial sector XH-loss rate in the consumer (household) sector X=loss rate for its total loan portfolio.