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.If the bank is expecting that the overall risk of the bank will be reduced by adding the life insurance underwriting to the bank,what type of effect are they expecting?

Question

Quizplus · Accepted Answer

The bank is expecting a product-line diversification effect by adding life insurance underwriting to its services. This is because the correlation between traditional services and the new underwriting services is only +0.10, indicating low correlation and therefore, diversification. By adding the new service, the bank can reduce its overall risk by spreading its business across different product lines, which can ultimately result in improved financial performance.

A Bank Is Considering Adding Life Insurance Underwriting to the Services