#### Details of this Paper

##### finance data bank

Description

solution

Question

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

Price : \$22