Hey, In volume 2 of the CFAI books page 376, question 9, part D: The answer states that because “more opportunities exist for expanding net interest margins with low risk in Winthrop’s loan portfolio than in it’s securities portfolio” that it should thus, “take less risk in it’s securities portfolio”. I don’t follow the logic, I though perhaps they should divert funds from the securities portfolio to make more loans as they are more profitable at less risk. I don’t see how having less risky loans implies they should take less risk in their securities portfolio. Can anyone shed some light on this?
I had no idea what the question was saying until after I read the answer. You have to assume that there is something to give up for the additional spread in both portfolios, so in the loan portfolio even though they said “with low risk” it wasn’t “with no additional risk”. Poorly worded, as usual. I’m so looking forward to the exam…
Thanks TooOld, That makes more sense to me.