A bank is planning to set up a new branch.It expects the new branch to generate 20 percent of the total business of the bank after it is opened.The bank expects the returns on this branch to be 15 percent with a standard deviation of 5 percent.Currently the bank has a 12 percent rate of return with a standard deviation of 4 percent.The correlation between the bank's current returns and the returns on the new branch is expected to be 0.25.What is the bank's total expected return after adding this branch?
A)15 percent
B)12.6 percent
C)12 percent
D)14.4 percent
E)15.5 percent

Question

Quizplus · Accepted Answer

The total expected return after adding the new branch can be calculated using the weighted average of the returns, considering the proportion of business generated by the new branch and the existing operations. The expected return of the new branch is 15%, and it will generate 20% of the total business. The existing operations have a return of 12%, and they will now account for 80% of the business. Thus, the total expected return is (0.20 * 15%) + (0.80 * 12%) = 3% + 9.6% = 12.6%.

A Bank Is Planning to Set Up a New Branch