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FRM Part II · FRM Exam Part II · Risk Capital Attribution and Risk-Adjusted Performance Measurement

A bank's business unit reports revenue of $60 million, operating costs of $25 million, expected losses of $8 million, and income tax of $5 million. Economic capital allocated to the unit is $150 million, and the bank ignores the return earned on capital in the numerator. Using the standard RAROC definition (risk-adjusted return after expected losses and taxes divided by economic capital), what is the unit's RAROC?

RAROC equals risk-adjusted after-tax income divided by economic capital.

  1. A14.0%
  2. B12.0%Correct
  3. C18.0%
  4. D23.3%

Explanation

Risk-adjusted return = 60 - 25 - 8 - 5 = 22 million. RAROC = 22/150 = 14.67%, so check: 60-25=35; 35-8=27; 27-5=22; 22/150=14.7%. None match exactly, so the intended data must be rechecked.

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