Question: Problem 14) a. Consider two individual loans, L1 and L2: each will pay 100 with probability 0.9, but will default and pay 0 with probability

Problem 14) a. Consider two individual loans, L1 and L2: each will pay 100 with probability 0.9, but will default and pay 0 with probability 0.1. Whether the two individual loans will pay or default are independent events. Since each individual loan has identical payoff prospect (with independent default probability), they each values the same individually. Compute the expected payment and the variance of payment of each individual loan. b. Consider a standard portfolio diversification product SD that is composed of 50% share of loan L1 and 50% share of loan L2, where L1 and L2 are as described in part a. Compute the expected payment and the variance of payment of SD.

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