# Question: Using the data in Problem 20 calculate a The expected

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?

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?

**View Solution:**## Answer to relevant Questions

Using the data in Problem 23, plot the volatility as a function of the number of firms in the two portfolios.In Problem 23, Consider an economy with two types of firms, S and I. S firms all move together. I firms move ...Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6, calculate the expected return of investing ina. Starbucks’ stock.b. Hershey’s stock.c. Autodesk’s stock.Suppose the average stock has a volatility of 50%, and the correlation between pairs of stocks is 20%. Estimate the volatility of an equally weighted portfolio with (a) 1 stock, (b) 30 stocks, (c) 1000 stocks.A hedge fund has created a portfolio using just two stocks. It has shorted $35,000,000 worth of Oracle stock and has purchased $85,000,000 of Intel stock. The correlation between Oracle’s and Intel’s returns is 0.65. The ...What is the risk premium of a zero-beta stock? Does this mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio and replacing it with the ...Post your question