FRM Part II · FRM Exam Part II · Integrated Risk Management
A bank has two business units with standalone economic capital of USD 80 million (Unit A) and USD 60 million (Unit B). The firm-wide economic capital, reflecting diversification, is USD 112 million. Using a pro rata allocation of the diversified capital in proportion to standalone capital, how much is allocated to Unit A?
Unit A receives USD 64 million. Its standalone capital is 80 of the 140 total, or 4/7, and applying that proportion to the diversified firm-wide capital of USD 112 million gives 64. This spreads the diversification benefit proportionally across units.
- AUSD 64 millionCorrect
- BUSD 80 million
- CUSD 56 million
- DUSD 72 million
Explanation
Total standalone is 140 million. Unit A's share is 80/140 = 4/7, and 4/7 × 112 = 64 million. Allocating the full standalone 80 ignores diversification benefit, while 56 would be an equal split.
Did you get it right without looking?
One question tells you little. A timed set on Integrated Risk Management shows your real accuracy, how long you take and where you lose marks.
More Integrated Risk Management questions
- A bank allocates economic capital to business units using incremental (marginal) contributions to total portfolio capital. The risk team not…
- A bank's board sets a risk appetite of a maximum annual operational loss of USD 40 million. The chief risk officer sets a risk tolerance tri…
- A bank aggregates two risk types with stand-alone capital of 100 each using the square-root formula. The correlation estimate is 0.2 in norm…
- A bank runs a severe scenario. Stressed credit losses are 400 million, trading losses are 250 million, and operational risk losses are 100 m…
- In a three-lines model for risk governance at a bank, which activity belongs to the second line?
- A bank's board approves a risk appetite statement that sets a ceiling on the loss it is willing to bear in a stress scenario. Within a sound…