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Answer: 3.0287
The correct answer is 3.0287. The calculation involves: 1. First calculating individual loan standard deviations: - σ₁ = √[0.02 - 0.02² × 15 × (1 - 0.4)] = 1.26 - σ₂ = √[0.02 - 0.02² × 20 × (1 - 0.25)] = 2.1 2. Then calculating portfolio variance: σ_p² = σ₁² + 2ρσ₁σ₂ + σ₂² = 1.5876 + 1.5876 + 4.41 = 9.1728 3. Finally: σ_p = √9.1728 = 3.0287 This demonstrates how portfolio diversification affects overall risk through correlation.
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Q-110. Calculate the standard deviation of losses for a portfolio containing two loans with the following characteristics:
A
2.4567
B
2.7891
C
3.0287
D
3.2156
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