Question
a. Consider two local banks. Bank A has 78 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has
a. Consider two local banks. Bank A has 78 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 6% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $78 million outstanding, which it also expects will be repaid today. It also has a 6% probability of not being repaid. Calculate the following:
a. The expected overall payoff of each bank.
b. The standard deviation of the overall payoff of each bank.
a. The expected overall payoff of each bank. The expected overall payoff of Bank A is
$____ million. (Round to the nearest integer.)
b. Consider the following 6 months of returns for 2 stocks and a portfolio of those 2 stocks: The portfolio is composed of 50% of Stock A and 50% of Stock B.
a. What is the expected return and standard deviation of returns for each of the two stocks?
b. What is the expected return and standard deviation of returns for the portfolio?
c. Is the portfolio more or less risky than the two stocks? Why?
a. What is the expected return and standard deviation of returns for each of the two stocks?
Jan | Feb | Mar | Apr | May | Jun | |||||||
Stock A | 2% | 5% | 6% | 3% | 2% | 4% | ||||||
Stock B | 1% | 2% | 9% | 0% | 5% | 1% | ||||||
Portfolio | 1.5% | 1.5% | 1.5% | 1.5% | 1.5% | 1.5% |
The expected return of Stock A is _____%. (Round to one decimal place.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started