Question

Using the data in Problem 20, calculate
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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  • CreatedAugust 06, 2014
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