Question

4. Information concerning the allocation of loan portfolios to different market sectors is given below: Allocation of Loan Portfolios in Different Sectors (%) Sectors National Bank A Bank B Commercial 30% 60% 15% Consumer 40% 25% 30% Real Estate 30% 15% 55% Bank A and Bank B would like to estimate how much their portfolios deviate from the national average. a) Which bank is further away from the national average? b) is a large standard deviation necessarily bad for a financial institution using this model?

Answer 1

Solution :-

Bank A - Using Xs to represent holding → portfolio Sectors Bank A Commercial (XA - XN) (0.60-0.30) = 0.09 Consumer IXA-xx) (0.25 -0.40) = 0.0225 Real Estate (X-X) (0.15-0.30) = 0.0225 6 0.135 1E (XA - XN) = 0.135 where, XA = loan portfolios Allocation of of Bank X e Allocation of of loan portfolios National average

Standard of bank deviation = a Jo.ous = 0.2121 g 21.21% Bank B - Sectess Bank B Commercial (X - XN) (0.15-0.30) = 0.0225 Consumer (XB - XN) ? | (0.30-0.40) = 0.01 Estate (XB-X (O.SS - 0.30) = 0.0625 Elx 8-XN) ² = 0.095 Real Standard deviation of bank B - - ) coas - 10095

- 30.031 666 666 66 = 0.1780 of 17.80% deviation Standard of bank A deviction Thus, Standard is more than of bank B. Therefore, Bank the national A deviates average more from than Bank B. b) No a higher Standaad deviation is not necessarilog bod for an FT because it could have comparative advantages that are not required of available to a national well diversified diversified bank.