Rockville Bank is reviewing its loan portfolios to estimate how diversified their portfolios are. For internal purposes, the Bank assesses credit risk into four categories – High Quality, Average Quality, Poor Quality, and Default. Over the years, the following transition matrix has evolved:

From/to	High	Average	Poor	Default
High	80%	15%	4%	1%
Average	10%	65%	20%	5%
Poor	5%	15%	55%	25%

For example, a loan rated High Quality this year has a 80% probability of remaining High Quality next year, a 15% probability of falling to Average Quality, and so on.

Based on this data, if

This year the portfolio contains $1,050M of High Quality, $325M of Average Quality, and $85M of Poor Quality loans, giving a total loan portfolio of $1,460M.

a. Estimate the loan portfolio mix in one year.

b. Suppose the bank wishes to maintain the current relative mix of credit type, High, $1,050M/$1,460M = 72%, Average, $325M/$1,460M = 22%, and Poor, $1,050M/$1,460M = 6%. How many new loans and of what type must the bank sell during the year to maintain this relative mix?

Answer rating: 100% (QA)

All financials below are in mn a Estimate the loan portfolio mix in one year Please see the working ... View the full answer