ing financial institutions (commercial banks, and consumer finance companies) are, thus, better able than are credit unions to offset greater risk with greater return. This disadvantage of the credit union makes the risk assessment process of crucial importance for the credit union.
For most credit unions, the key concern with respect to the return on consumer automobile loans is the spread between the interest rate on the loan and the cost of the funds from which the loan will be made (Davids, 1984). Almost all of the loan capital for credit unions is acquired through member shares, which, in effect, are credit union member savings accounts (Bogen, 1990).
Credit unions, as membership institutions, typically have a greater obligation to extend consumer loans than is true of competing institutions. Thus, credit unions are less likely than are commercial banks and consumer finance companies to invest funds in financial securities at times when consumer loans may not provide a return equal to those available in the credit markets (Black and Dugger, 1981). If the credit risk of an applicant is acceptable, and if the loan spread enables the institution to cover expenses and earn a small profit, therefore, a credit union will likely approve a consumer automobile loan for a member.
APPLICATION OF THE MEAN VARIANCE, OR THE TIME
STATE PREFERENCE MODELS BY CREDIT UNIONSIN THE EXTENSION OF CONSUMERAUTOMOBILE LOANS
Portfolio selection is an approach to the solution of the optimization problem. It is a process whereby investors choose a range of investments which balances risk diversification, income requirements, and capital appreciation objectives (Bullock and Stallybrass, 1977).
The Markowitz (1959) mean variance model demonstrated the critical significance, in terms of risk, of the covariance of a stock with all other stocks included in a portfolio. A primary contribution of Markowitz (1959) was the specific derivatio...