A rbc has 100 loans outstanding each for 1 million which it, Ask an Expert

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(a) RBC has 100 loans outstanding, each for $1 million, which it expects to be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. BMO has only one loan of $100 million outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the types of risk each bank faces. Which bank faces less risk? Why?

(b) Explain why the risk premium of a stock does not depend on its diversifiable risk.

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Category:- Basic Finance
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