Suppose that an FI holds two loans with the following characteristics. Annual Spread Between Loss to Fl Expected Loan Rate and FI's Annual Given Loan X Cost of Funds Fees Default Default Frequency 1 .45 5.5% 2 .55 3.5 2.25% 1.75 30% 3.5% P12 = -.15 20 1.0 Calculate the return and risk on the two-asset portfolio using Moody's KMV Portfolio Manager.

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