FRM Part II · FRM Exam Part II · Integrated Risk Management
A bank has two business units with stand-alone economic capital of USD 60 million (Unit A) and USD 80 million (Unit B). Diversified firm-wide economic capital is USD 122 million. Units are allocated diversified capital in proportion to their stand-alone capital. How much is allocated to Unit B?
Unit B receives about USD 69.7 million. Its stand-alone capital is 80 of the 140 total, or 4/7, and applying that proportion to diversified capital of USD 122 million gives 69.7 million. Unit A receives the remaining 52.3 million.
- AUSD 61.0 million
- BUSD 66.0 million
- CUSD 69.7 millionCorrect
- DUSD 80.0 million
Explanation
Sum of stand-alone capital is 140. Unit B's share is 80/140 = 4/7. Allocation = 122 x 4/7 = 69.71 million. Check: Unit A gets 122 x 3/7 = 52.29, and 52.29 + 69.71 = 122. USD 80 million ignores diversification, and USD 61.0 million splits the total equally.
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