Using the data in Problem 20, calculate a. The expected overall payoff of each bank. b. The
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a. The expected overall payoff of each bank.
b. The standard deviation of the overall payoff of each bank.
In Problem 20, Consider two local banks. Bank A has 100 loans outstanding, each for $1 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 $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the type of risk each bank faces. Which bank faces less risk? Why?
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The expected payoffs are the same but bank A is less risky See solution ...View the full answer
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