Use the following information to answer the problem(s)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.
-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.

Question

Quizplus · Accepted Answer

The standard deviation of the overall payoff for Bank B can be calculated using the formula for the standard deviation of a binomial distribution: σ = √(n * p * (1-p)) * loss per default. Here, n = 100, p = 0.05, and the loss per default is $1,000,000. Thus, σ = √(100 * 0.05 * 0.95) * $1,000,000 = $2,179,000.

Use the Following Information to Answer the Problem(s)below