Please answer study questions

7. Consider two local banks. Bank A has 100 loansoutstanding, each for $1.0 million, that it expects will

5% probability ofdefault, 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 $100 millionoutstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Which bank faces lessrisk? Why?

(Select the best choicebelow.)

A. The expected payoffs are thesame, but Bank A is less risky. I prefer Bank A.

B. The expected payoffs are thesame, but Bank A is riskier. I prefer Bank B.

C. In both cases the expected loan payoff is thesame: $100million0.95=$95.0million. Consequently, Idon't care which bank I own.

D. The expected payoff is higher for BankA, but is riskier. I prefer Bank B.

8. Suppose therisk-free interest rate is 5%, and the stock market will return either +40% or 20%

eachyear, with each outcome equally likely. Compare the following two investmentstrategies: (1) invest for one year in therisk-free investment, and one year in themarket, or(2) invest for both years in the market.

a. Which strategy has the highest expected finalpayoff?

b. Which strategy has the highest standard deviation for the finalpayoff?

c. Does holding stocks for a longer period decrease yourrisk?

a. Which strategy has the highest expected finalpayoff?

The two possible outcomes for investment(1) are ______% or ______%.

(Enter the outcomes from largest to smallest and round to one decimalplace.)