Bank of Idaho holds two loans: a $15,000 loan to Bengals @ 16.26% per year, and a $45,000 loan to Idaho State University @3.75% per year. You have calculated the volatility (?) for the loans as follows: Bengals (? = 0.2678) and ISU (? = 0.0835). Both firms are in the non-profit education sector. The correlation between the two loans is 0.65.
Using the two loans above,
a) Calculate the Expected Return on the Portfolio, E(RP)
b) Calculate the Standard Deviation of the Portfolio, ?P.
Using Moody’s KMV Portfolio Risk Model, calculate:
a) The Expected Return E(RS) and standard deviation (?S) on the Bengals loan.
b) The Expected Return E(RUT) and standard deviation (?UT) on the Idaho state University loan.
c) Assuming the loan values do not change, calculate the portfolio expected return, E(RP).
d) Calculate the portfolio standard deviation (?P).