International diversification of loans can best reduce a bank's overall credit risk if
A) the countries where loans are given are clustered together in a single continent.
B) the countries where loans are given have economic cycles that do not move together over time.
C) A and B
D) none of the above

Question

Quizplus · Accepted Answer

International diversification of loans can best reduce a bank's overall credit risk if the countries where loans are given have economic cycles that do not move together over time, meaning that if there is a default or downturn in one country, it is unlikely to be happening in all other countries at the same time. Clustering loans in a single continent (option A) would not necessarily reduce credit risk since economic shocks can affect all countries within a continent. Option C is a combination of options A and B, but option B alone is the best choice. Option D is incorrect since option B is a valid choice.

International Diversification of Loans Can Best Reduce a Bank's Overall