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Question;10.5 Common Versus Independent Risk;1) Common risk;is also called;A) diversifiable;risk.;B) correlated;risk.;C) uncorrelated;risk.;D) independent;risk.;Use the;following information to answer the problems below.;Consider two;banks. Bank A has 1000 loans outstanding each for $100,000, that it expects to;be fully repaid today. Each of Bank A's loans have a 6% probability of default;in which case the bank will receive $0 for each of the defaulting loans. Bank B;has 100 loans of $1 million outstanding, which it also expects to be fully;repaid today. Each of Bank B's loans have a 5% probability of default, in which;case the bank will receive $0 for each of the defaulting loans. The chance of;default is independent across all the loans.;2) The expected;overall payoff to Bank A is;A) $5,000,000;B) $6,000,000;C) $94,000,000;D) $95,000,000;3) The expected;overall payoff to Bank A is;A) $5,000,000;B) $6,000,000;C) $94,000,000;D) $95,000,000;4) The standard;deviation of the overall payoff to Bank A is closest to;A) $689,000;B) $751,000;C) $2,179,000;D) $2,375,000;5) The standard;deviation of the overall payoff to Bank B is closest to;A) $751,000;B) $2,179,000;C) $2,375,000;D) $21,794,000;Use the information;for the question(s) below.;Big Cure and;Little Cure are both pharmaceutical companies.;Big Cure presently has a potential "blockbuster" drug before;the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will;produce $1 billion in net income for Big Cure.;Little Cure has 10 separate less important drugs before the FDA waiting;for approval. If approved, each of;Little Cure's drugs would produce $100 million in net income for Little;Cure. The probability of the FDA;approving a drug is 50%.;6) What is the;expected payoff for Big Cure's Blockbuster drug?;A) $100 million;B) $0;C) $1 billion;D) $500 million;7) What is the;expected payoff for Little Cure's ten drugs?;A) $500 million;B) $100 million;C) $1 billion;D) $0;8) What is the;standard deviation of Big Cure's average net income for their new blockbuster;drug?;A) $0;B) $1 billion;C) $100 million;D) $500 million;9) The standard;deviation of Little Cure's average net income for their ten new drugs is;closest to;A) $50 million;B) $25 million;C) $16 million;D) $500 million

Paper#51031 | Written in 18-Jul-2015

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