Consider the Following Data for a Two-Asset Portfolio Using the Moody's Analytics Model:
A

question 66

Essay

Consider the following data for a two-asset portfolio: $$\begin{array} { | c | l | l | l | l | l | l | } \hline \begin{array} { c } \text { Loan } \\i\end{array} & \begin{array} { l } \text { Weight } \\i\end{array} & \begin{array} { l } \text { Annual spread between loan rate } \\\text { and Fl's cost of funds }\end{array} & \text { Annual fees } & \begin{array} { l } \text { Loss to FI } \\\text { given default }\end{array} & \begin{array} { l } \text { Expected default } \\\text { frequency }\end{array} & \\\hline 1 & 0.35 & 4.5 \% & 2.0 \% & 35 \% & 5 \% &P_{12}=-0.28 \\\hline 2 & 0.65 & 5 \% & 2.5 \% & 30 \% & 4 \% & \\\hline\end{array}$$ Using the Moody's Analytics model:
a.calculate the returns for loans 1 and 2.
b.calculate the risk for loans 1 and 2.
c.calculate the return for the loan portfolio.
d.calculate the risk for the loan portfolio.
e.explain your findings in (a) to (d).

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Definitions:

Metabolic Tolerance

The body's adjustment to a substance through the increase of metabolic processes, reducing the substance's effectiveness over time.

Cellular Tolerance

A cellular adaptation in which the response to a substance decreases after repeated exposure, often seen with drugs or toxins.

Hippocampus

A region of the brain crucial for the formation of new memories and spatial navigation.

Amygdala

An almond-shaped section of nervous tissue located in the temporal (side) lobe of the brain; involved in emotions such as fear and pleasure.