A bank holds a loan portfolio with the following characteristics: Xi Correlation Annual spread between loan rate and bank's cost of funds Loss to bank given default Expected default frequency Loan i Annual fees .6 6% 3% 20% 3% -0.2 .4 5% 2% 30% 5% Question: what is the return and standard deviation on loan 2? Selected Answer: A. 5.5%, 7.21%

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.