I will upvote immediately if this is answered ASAP.

Suppose that a bank holds two loans with the following characteristics. Loan X Spread between Loan Rate and Bank's Cost of funds Annual Loss to bank Fees given default Expected default frequency 1 0.4 7.5% 1.5% 30% 4% 2 0.6 5.5% 0.5% 20% 3% Note that for each loan, the expected return can be estimated by AIS, - (EDF x LGD), and the standard deviation by (EDF X (1-EDF))1/2 x LGD. The expected return for loan 2 is approximately O 5.2% O 5.0% 4.6% O 4.8% 0 5.4%