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FRM Part II · FRM Exam Part II · Risk Capital Attribution and Risk-Adjusted Performance Measurement

A bank allocates capital using Euler (marginal contribution) allocation based on VaR. Unit A has a stand-alone VaR of 60, unit B has 80, and portfolio VaR is 120. Under Euler allocation, unit A is allocated 50. How much is allocated to B?

B is allocated 70. Euler (marginal contribution) allocation is additive, so the unit allocations must sum to the portfolio VaR of 120. With 50 going to unit A, the remainder, 120 minus 50, equals 70 for unit B, below its stand-alone VaR of 80.

  1. A70Correct
  2. B80
  3. C60
  4. D50

Explanation

Euler allocation is fully additive: contributions sum to portfolio VaR. So B receives 120 - 50 = 70. Choosing 80 uses B's stand-alone VaR, ignoring diversification, while 60 is A's stand-alone figure.

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