12-8 The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.

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The variance of returns of a portfolio of loans is not necessarily equal to the arithmetic average of the variance of returns of the individual loans. The formula for the variance of a portfolio takes into account the correlation between the returns of each loan, which can impact the overall risk of the portfolio. Therefore, the variance of a portfolio of loans may be higher or lower than the arithmetic average of the variance of returns of the individual loans.

12-8 the Variance of Returns of a Portfolio of Loans