Suppose that an FI holds two loans with the following characteristics.                                               Annual                  Spread Between                                 Loss to FI      Expected                Loan Rate and FI=s           Annual           Given          Default        Loan        Xi          Cost of Funds                  Fees            Default        Frequency            1         .6                  4.5%                         2.5%             30%              3%              ρ12 = -.4            2         .4                  3.5%                            2%              20%              5%          Calculate of the return and risk on the two-asset portfolio using KMV Portfolio Manager.

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