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

A bank's total diversified capital is 100. Without Unit X, the bank's capital would be 70. Unit X has stand-alone capital of 50. Which statement is correct about attributing capital to Unit X?

Incremental capital for Unit X is 30, the difference between total capital of 100 and 70 without the unit. It is below the 50 stand-alone figure because of diversification, and incremental amounts across units generally do not sum to total capital.

  1. AIncremental capital is 30, and this is the diversification-adjusted amount the bank must add for Unit XCorrect
  2. BIncremental capital is 50, equal to stand-alone capital
  3. CIncremental capital is 70, equal to capital without Unit X
  4. DIncremental capital is 30, and incremental amounts for all units always sum exactly to 100

Explanation

Incremental capital = 100 − 70 = 30, which is less than the stand-alone 50 because of diversification. Incremental amounts across units generally do not sum to the total, ruling out the last option.

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