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 return for 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.In this problem,the proposed new branch _______ overall risk exposure due to ______ effect.

Question

Quizplus · Accepted Answer

The proposed new branch will reduce overall risk exposure due to geographical diversification. The negative correlation (-0.3) between the bank's current returns and returns on the new branch means that if one branch's returns decrease, the other's returns will likely increase, which reduces overall risk. Geographic diversification is an effective strategy for reducing risk by spreading business across different geographic regions.

The Clearwater National Bank Is Planning to Set Up a New