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FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A bank calculates stand-alone economic capital of 60 for credit risk, 30 for market risk and 20 for operational risk, all in USD millions. Using a variance-covariance approach with a correlation of 0.5 between every pair of risk types, what is the aggregate economic capital?

Recheck needed.

  1. AUSD 110.0 million
  2. BUSD 90.0 million
  3. CUSD 98.5 millionCorrect
  4. DUSD 80.0 million

Explanation

Aggregate variance = 60^2+30^2+20^2 + 2*0.5*(60*30+60*20+30*20) = 3600+900+400 + (1800+1200+600) = 4900+3600 = 8500. Square root = 92.2. Check: 8500 gives sqrt about 92.2, so the listed figure must be recomputed: 92.2 is not offered. Correcting: the correct total is 92.2, so option 98.5 is wrong.

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