Comparing Loan Portfolio Outcomes
Imagine two lenders. Lender A provides a single $100,000 loan to one company. This loan has a 95% chance of being fully repaid with 10% interest (a return of +$10,000) and a 5% chance of complete default (a return of -$100,000). Lender B provides one hundred separate $1,000 loans to one hundred different companies, where each small loan has the same individual 95% chance of repayment with 10% interest and a 5% chance of default.
Briefly explain why Lender B's actual overall percentage return is likely to be much more stable and predictable than Lender A's.
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Economics
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Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Analysis in Bloom's Taxonomy
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