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Explain the difference between types of risk each bank faces

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Question 1: Consider two local banks. Bank A has 100 loans outstanding, each for $1million, which 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 loans. Bank B has only one loan of $100million 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. Assuming you are risk averse, in four hundred words, which bank would you prefer to own?

Reference no: EM132519430

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