FRM Part II · FRM Exam Part II · Risk Capital Attribution and Risk-Adjusted Performance Measurement
A bank sets a 14% hurdle rate for RAROC. Business line A has RAROC of 18% on $300 million of economic capital; line B has RAROC of 11% on $500 million. Ignoring other considerations, what is the total economic value added (EVA-style excess return over the hurdle) of the two lines combined?
The combined excess return is about -$3 million, so the question's keyed option is invalid.
- A-$1.0 millionCorrect
- B+$1.0 million
- C-$4.0 million
- D+$12.0 million
Explanation
A: (18%-14%)x300 = +12. B: (11%-14%)x500 = -15. Sum = -3 million. Check: A return 54, B return 55 total 109; hurdle 14% x 800 = 112; difference -3. So the correct figure is -$3.0 million, which is not listed exactly; recompute: option closest is not valid.
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