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Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, which it expects will be repaid today. Each loan has a
Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, which it expects will be repaid today. Each loan has a 5% probalility of default, in which case the ban is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $100 million outstanding, which it also expects to be repaid today. It also has a 5% probability of not being repaid.
(a) Calculate the expected overall payoff of each bank.
(b) Calculate the standard deviation of the overall payoff of each bank.
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