Murphy National Bank is thinking about adding a new branch in a very different market area.It estimates that the new office will have an expected return of 16% with a standard deviation of 8%.Currently,it has an expected return of 12% with a standard deviation of 4%.The correlation between the returns on the new branch and the bank's current returns is estimated to be 0.20.The bank estimates that the new branch will represent 15 percent of the revenues of the bank.What is the expected return of the bank with the new branch?
A)12.6 percent
B)15.4 percent
C)4.6 percent
D)7.4 percent
E)8.2 percent

Question

Quizplus · Accepted Answer

The expected return of the bank with the new branch can be calculated using the weighted average formula for expected returns. The bank's current expected return is 12%, and the new branch has an expected return of 16%. Since the new branch will represent 15% of the bank's revenues, the calculation is as follows: (0.85 * 12%) + (0.15 * 16%) = 10.2% + 2.4% = 12.6%.

Murphy National Bank Is Thinking About Adding a New Branch