A bank is considering adding security brokerage services to the services it offe

Question

A bank is considering adding security brokerage services to the services it offers. It has estimated that the expected return and standard deviation of its traditional service are 6% and 14% respectively. It has estimated that the expected return and standard deviation of its new securities brokerage services are 14% and 24% respectively. The correlation between these services has been estimated to be -.4 and the bank estimates that 80% of its business will be from traditional services and 20% from the new services. What is the expected return of the new combined firm?

7.2%

6.8%

7.6%

9.2%

8.4%

7.2%

6.8%

7.6%

9.2%

8.4%

Explanation / Answer

Given expected return of the traditional services=6%

Weighted after addition of new services=80%.

Expected return of the new services=14%

Weightage of new services =20%.

Expected return of the new combined business =6%*0.8+14%*20%

=7.6%

Therefore answer is third option.

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