Question
A regression of sectoral loan losses against total loans losses, both measured as a percentage of loans, of a bank results in the following beta
A regression of sectoral loan losses against total loans losses, both measured as a percentage of loans, of a bank results in the following beta coefficients for the real estate (RE) and commercial (CL) loan variables: bRE = 1.2, bCL = 0.5. The intercept for both regressions is zero. According to the Modern Portfolio Theory, the results indicate that for the bank
Select one:
a. Both sectors have the same degree of systematic default risk and benefit of diversification.
b. The commercial loans have a higher systematic default risk and thus higher benefit of diversification.
c. The commercial loans have a higher systematic default risk and thus lower benefit of diversification.
d. The real estate loans have a higher systematic default risk and thus lower benefit of diversification.
e. The real estate loans have a higher systematic default risk and thus higher benefit of diversification.
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