The Clearwater National Bank is planning to set up a new branch.This new branch is anticipated to generate 5 percent of the total business of the bank after it is opened.The bank also expects the returns on this branch to be 15 percent with a standard deviation of 5 percent.Currently the bank has a 10 percent rate of return with a standard deviation of 5 percent.The correlation between the bank's current return and returns on the new branch is expected to be -0.3.What is the bank's total expected return after adding this branch?

Question

Quizplus · Accepted Answer

To find the expected return of the bank after adding the new branch, we need to use the following formula:

Total Expected Return = Current Return + (Weight of New Branch x (Return on New Branch - Current Return))

Here, the weight of the new branch is given as 5 percent.

So, substituting the values, we get:

Total Expected Return = 10 percent + (0.05 x (15 percent - 10 percent))

Total Expected Return = 10 percent + (0.05 x 5 percent)

Total Expected Return = 10.25 percent

Therefore, the correct answer is D) 10.25 percent.

The Clearwater National Bank Is Planning to Set Up a New