Why is it difficult for small banks and thrifts to measure credit risk using modern portfolio...

Question:

Why is it difficult for small banks and thrifts to measure credit risk using modern portfolio theory?

Modern Portfolio Theory:

The modern portfolio theory is the theory of how the return from the investments can be maximized at a present value of risk. It formalizes the diversification as it believes that investing in different assets is less risky than investing in one type.

Answer and Explanation:

According to the modern portfolio theory, the risk would be eliminated using diversification. But asset diversification is not possible in small banks and thrifts in the domestic market as they render services to only a few industries because they deal with less number of the firm.

The best portfolio help in the construction of the efficient frontier in modern portfolio risk and the present risk level helps in estimating the expected return.


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Modern Theory of Management

from Business 101: Principles of Management

Chapter 4 / Lesson 1
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