Risk premium of a stock, Finance Basics

(a) RBC has 100 loans outstanding, each for $1 million, which it expects to be repaid today.  Each loan has a 5% probability of default, in which case the bank is not repaid anything.  The chance of default is independent across all the loans.  BMO has only one loan of $100 million outstanding, which it also expects will be repaid today.  It also has a 5% probability of not being repaid.  Explain the difference between the types of risk each bank faces.  Which bank faces less risk?  Why?

(b) Explain why the risk premium of a stock does not depend on its diversifiable risk.

Posted Date: 2/22/2013 3:11:55 AM | Location : United States







Related Discussions:- Risk premium of a stock, Assignment Help, Ask Question on Risk premium of a stock, Get Answer, Expert's Help, Risk premium of a stock Discussions

Write discussion on Risk premium of a stock
Your posts are moderated
Related Questions
Spot transaction hedge/Money market hedge There are three parts to this question. Please answer all parts. The Chicken Company, a company with headquarters in Switzerland, has a r


Ask questioSay that a buyer of bonds values good bonds at $500 and values bad bonds at $250. Sellers of both good and bad bonds value them at $350. If the fraction of good sellers

Business Activity Cycle The interest rates also depend on business cycles as above. Because the economy moves in the four (4) business cycles, such interest rates will shift l

system integration and infrastructure development is the

Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a marke

Classification of Debenture Finance i) Secured Debentures These are those types of debentures which a company will secure generally in two ways, secured along with a fixe

Partnership Definition -Partnership may be defined as a relationship between persons carrying on a business in common with a view of profits. In partnership business, two or mo

Present Value of an Annuity - DCF Technique An individual investor may not necessarily acquire a lump sum after several years however rather obtain a constant periodic amount

Functions of the Stock Exchange The essential function of a stock exchange is the raising of funds for investment in long-term assets. Whereas this basic function is very sign