Asset Management and Commercial Bank Portfolio Behavio

The return of the loan is be by the following equation (Saunders & Cornett, 2006):

Return = (Spread + Annual Fees) - (Default riskiness x Expected Loss)

The risk of the loan is defined by the following equation (Saunders & Cornett, 2006):

Risk = (Square root [Default Risk x (1 - Default Risk)]) x Expected Loss

Risk = (Square Root [.03 x (1 - .03)]) x .20

Risk = (Square Root [.03 x .97]) x .20

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