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A bank holds a loan portfolio with the following characteristics: Loan i Xi Annual spread between loan rate and banks cost of funds Annual fees

A bank holds a loan portfolio with the following characteristics:

Loan i

Xi

Annual spread between loan rate and banks cost of funds

Annual fees

Loss to bank given default

Expected default frequency

Correlation

1

.6

6%

3%

20%

3%

-0.2

2

.4

5%

2%

30%

5%

A. What is return and standard deviation on loan 1?

B. What is return and standard deviation on loan 2?

C. A. What is return and standard deviation on loan portfolio?

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