Cube Bank has compiled the following migration matrix on consumer loans. The higher the risk grade the higher the default risk. If in the

most recent year, the bank manager finds that the transition probability from risk grade 3 to 2 is 0.03 and to 4 is 0.18, then the bank

manager should take which of the following actions to reduce concentration risk?

Risk Grade at End of Year

Risk grade at

beginning of

year

.88

.02

.02

.10

24

.03

02

.02

.09

.78

11

Select one:

Restrict supply of loans to risk grade 3 borrowers

Increase supply of loans to risk grade 3 borrowers

C.

Increase supply of loans to risk arade 2 borrowers.

d. Restrict supply of loans to risk grade 1 borrowers

a A

Increase credit risk premium on risk 2 borrowers