The bank estimates its economic capital on product 1 to


ExBank has an opportunity to deploy $1.125 billion of its capital to two new loan products. The revenues of product 1 and 2 are $60 mil- lion and $100 million, respectively. Operating costs of product 1 and 2 are the same at $10 million, both products have identical funding costs of $30 million, and expected losses for product 1 and 2 are $15 million and $45 million, respectively. The bank is required to hold 4 percent capital on products 1 and 2. The bank estimates its economic capital on product 1 to be $25 million and for product 2 to be $90 million. The bank's target hurdle rate is 20 percent. Which product would you recommend the bank invest in and why?

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Financial Management: The bank estimates its economic capital on product 1 to
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