Consider two local banks. Bank A has

86

loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a

5%

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

$86

million outstanding, which it also expects will be repaid today. It also has a

5%

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.