A bank is considering adding security underwriting services to the services it offers. It has estimated...

 

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A bank is considering adding security underwriting services to the services it offers. It has estimated that the expected return and standard deviation of its traditional service are 8% and 10% respectively. It has estimated that the expected return and standard deviation of its new securities underwriting services are 16% and 20% respectively. The correlation between these services has been estimated to be -0.3 and the bank estimates that 85% of its business will be from traditional services and 15% from the new services. What is the expected return of the new combined firm? A bank is considering adding security underwriting services to the services it offers. It has estimated that the expected return and standard deviation of its traditional service are 8% and 10% respectively. It has estimated that the expected return and standard deviation of its new securities underwriting services are 16% and 20% respectively. The correlation between these services has been estimated to be -0.3 and the bank estimates that 85% of its business will be from traditional services and 15% from the new services. What is the expected return of the new combined firm?

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To calculate the expected return of the new combined firm we can use the weighted avera... View the full answer