The following table shows the details of the two loans made by Bank ABC. By employing the
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Question:
The following table shows the details of the two loans made by Bank ABC. By employing the KMV model, compute the return and risk of Bank ABC's overall loan portfolio which is made up of two loans with a correlation coefficient of -0.15.
| Weight | Annual Spread between Loan Rate and Bank's Cost of funds | Annual Fees | Loss to Bank Given Default (LGD) | Expected Default Frequency (EDF) |
Loan 1 | 60% | 2.8% | 1.9% | 25% | 3% |
Loan 2 | 40% | 2.9% | 1.8% | 20% | 2% |
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