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A bank is considering adding security underwriting services to the services it offers
A bank is considering adding security underwriting services to the services it offers. It has estimated that the expected return and standard deviation of its traditional service are 8% and 10% respectively. It has estimated that the expected retum and standard deviation of its new securities underwriting services are 16% and 20% respectively. The correlation between these services has been estimated to be -0.3 and the bank estimates that 75% of its business will be from traditional services and 25% from the new services. What is the expected return of the new combined firm? 10.0% 9.296 9.6% 10.4% 8.8
Expert Solution
Expected return of traditional services= 8%
Expected return of new securities underwriting services= 16%
Weight of traditional services =75% or 0.75
Weight of new securities underwriting services =25% or 0.25
Expected return of new combined form =( weight of traditional services * expected return of traditional services )+ (weight of new service underwriting services *expected return of new underwriting services)
=(0.75* 8) + (0.25* 16)%
= 6 + 4 %
=10.0 % (Answer)
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