This one should be easier. I think I already know the answer, but lack of remembering Stats is killing me right now.
Assume that the probability of a borrower defaulting on a loan is 0.02. If the borrower defaults, the lender loses the entire amount of funds loaned. If the borrower does not default, the return to the lender will be 0.12.
This was the first question. I was to find what the expected return was for one loan.
Expected Return: 9.76% =(0.98*0.12)+0.02*(-100%)
Standard Deviation: 15.68%
Probability of Negative Returns: 2.68%
Now, there are 500 loans made, all independent of one another, but using the same information. This is where the Law of Large Numbers come in.
How do I figure our the expected return? I want to say the expected return is going to be close to the 12% due to the much larger portfolio.
Anyway, here are the choices:
0.1276
0.1176
0.1076
0.0976
Any help would be most appreciative.
Assume that the probability of a borrower defaulting on a loan is 0.02. If the borrower defaults, the lender loses the entire amount of funds loaned. If the borrower does not default, the return to the lender will be 0.12.
This was the first question. I was to find what the expected return was for one loan.
Expected Return: 9.76% =(0.98*0.12)+0.02*(-100%)
Standard Deviation: 15.68%
Probability of Negative Returns: 2.68%
Now, there are 500 loans made, all independent of one another, but using the same information. This is where the Law of Large Numbers come in.
How do I figure our the expected return? I want to say the expected return is going to be close to the 12% due to the much larger portfolio.
Anyway, here are the choices:
0.1276
0.1176
0.1076
0.0976
Any help would be most appreciative.
