The Chahad Bank wants to open a new branch in a distant city with very different economic conditions.Currently,the bank has an expected return of 15% with a standard deviation of 7%.The new branch is expected to have a return of 20% with a standard deviation of 10%.The correlation between the bank's returns and the returns from the new branch is -0.3.The new branch is expected to contribute 10% of the bank's revenues.What is the expected return for the bank if they add the new branch?
A)35%
B)19.5%
C)17.5%
D)15.5%
E)-15.9%

Question

Quizplus · Accepted Answer

The expected return for the bank after adding the new branch is calculated by taking a weighted average of the returns from the current bank and the new branch. The formula is: (0.9 * 15%) + (0.1 * 20%) = 13.5% + 2% = 15.5%.

The Chahad Bank Wants to Open a New Branch in a Distant