Consider two local banks, Consider two local banks. Bank A

Consider two local banks

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Consider two local banks. Bank A has 100 loans? outstanding, each for $ 1.0 ?million, that it expects will 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. Bank B 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. Which bank faces less? risk? Why? ?(Select the best choice? below.)

A. The expected payoffs are the? same, but Bank A is less risky. I prefer Bank A.

B. The expected payoff is higher for Bank? A, but is riskier. I prefer Bank B.

C. In both cases the expected loan payoff is the? same: $ 100 million times 0.95 equals $ 95.0 million . ?Consequently, I? don't care which bank I own.

D. The expected payoffs are the? same, but Bank A is riskier. I prefer Bank B.

Reference no: EM131359114

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