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:

Direct Labor-Hours

The total hours worked by employees directly involved in the manufacturing process or providing services.

Manufacturing Overhead

All indirect costs associated with the production process, such as maintenance, utilities, and quality control costs.

Cost of Goods Sold

The direct costs attributed to the production of the goods sold by a company, including material and labor costs.

Underapplied Overhead

A condition where the applied manufacturing overhead is less than the actual manufacturing overhead.