Question

1. The management of the WSB is concerned that they are providing loans to too many small borrowers, who are expensive to service. They therefore institute a change that all loans have to be in unit sizes of $100,000 (in other words, each customer can only borrow set amounts like $100,000, $200,000, $300,000 and so on, and cannot borrow any amount below $100,000 nor can they borrow any value between $100,000 and $200,000 or between $200,000 and $300,000 and so on). With the same constraints holding as in Part A (40% of lending has to go into mortgages, the amount allocated to personal loans cannot exceed 60% of the amount allocated to car loans) what is WSBs optimal portfolio when then have $1 million of new funds to lend and what is their annual return, in $, with this additional restriction that loans have to be in unit sizes of $100,000? (2 marks each, for 8 marks total)

Allocation to mortgages _______________

Allocation to personal loans ______________

Allocation to car loans ______________

Annual return, in $, at the optimal loan mix? ________________