Suppose that an FI holds two loans with the following characteristics.

The return on loan 1 is R1 = 6.25%, the risk on loan 2 is σ2 = 1.8233%, and the return of the portfolio is Rp = 4.555%. Calculate of the loss given default on loans 1 and 2, the proportions of loans 1 and 2 in the portfolio, and the risk of the portfolio, σp, using Moody’s Analytics RiskFrontier.

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Annual Spread between Loan Rate and FI's Loan X Cost of Funds 12 ? 4.0% ? 2.5 Loss to Expected FI Given Default Annual Fees Default Frequency 1.50% ?% 4.0% P12=-0.10 1.15 ? 1.5