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FRM Part II · FRM Exam Part II · Digital Resilience and Financial Stability: The Quest for Policy Tools in the Financial Sector

A bank has 20 critical services. Provider A supports 8, Provider B supports 6, Provider C supports 4 and Provider D supports 2, each service using exactly one provider. Using the Herfindahl-Hirschman Index on service share (shares as decimals), what is the HHI, and how does it compare with a perfectly even split across the four providers (0.25)?

The HHI is 0.30, higher than the 0.25 of an even four-way split. Shares of 40%, 30%, 20% and 10% squared give 0.16, 0.09, 0.04 and 0.01, summing to 0.30, so reliance is more concentrated than an equal distribution.

  1. A0.30, above the even-split value of 0.25, indicating higher concentrationCorrect
  2. B0.30, below the even-split value of 0.25, indicating lower concentration
  3. C0.25, equal to the even split, indicating no concentration
  4. D0.34, above the even-split value of 0.25, indicating higher concentration

Explanation

Shares are 0.40, 0.30, 0.20, 0.10. Squares are 0.16+0.09+0.04+0.01=0.30. The even split gives 4×0.0625=0.25, so 0.30 shows greater concentration. Option D wrongly adds the unsquared shares of the top two providers squared incorrectly; option C ignores the uneven weights.

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