A bank is considering adding life insurance underwriting to the services it offers.It has estimated that the expected return and standard deviation of its traditional services are 12 percent and 6 percent respectively.It has also estimated that the expected return and standard deviation of its new underwriting services are 18 percent and 10 percent respectively.The correlation between these services has been estimated to be +0.10 and the bank estimates that 90 percent of its business will be from traditional services and 10 percent from the new underwriting services.What is the expected return of the new combination of services?

Question

Quizplus · Accepted Answer

The expected return of the new combination of services is calculated as a weighted average of the expected returns of the traditional and new services: (0.90 * 12%) + (0.10 * 18%) = 12.60%.

A Bank Is Considering Adding Life Insurance Underwriting to the Services