What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated (ρ = 0)?

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When loan returns are uncorrelated (ρ = 0), the risk (standard deviation) of the bank's loan portfolio can be calculated using the formula for the standard deviation of a portfolio of uncorrelated assets: $\sigma_p = \sqrt{\frac{\sigma_1^2 + \sigma_2^2 + ... + \sigma_n^2}{n}}$, where $\sigma_p$ is the portfolio standard deviation, $\sigma_1, \sigma_2, ..., \sigma_n$ are the standard deviations of individual loans, and $n$ is the number of loans. Given that the individual standard deviations and the number of loans are not specified, the correct answer must be inferred from the context of the question, which suggests a scenario where the portfolio's risk is lower due to the lack of correlation among loan returns. Among the provided options, 1.18 percent (E) is a plausible value for a diversified, uncorrelated loan portfolio's risk.

What Is the Risk (Standard Deviation of Returns) on the Bank's