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

A risk manager notes that a trading desk has a RAROC of 14% against a firm-wide hurdle rate of 11%, and economic capital of $200 million. Which statement about the desk's economic value added is correct?

EVA is positive at $6 million. Risk-adjusted return of 14% exceeds the 11% hurdle by three percentage points, and applying that spread to $200 million of economic capital gives the excess return created above the shareholders' required return.

  1. AEVA is positive and equals $6 millionCorrect
  2. BEVA is positive and equals $28 million
  3. CEVA is positive and equals $22 million
  4. DEVA is zero because RAROC exceeds the hurdle rate

Explanation

EVA = (RAROC - hurdle) x capital = (14% - 11%) x 200 = $6 million. The $28 million option is risk-adjusted income only, and $22 million is the capital charge. A RAROC above the hurdle implies positive, not zero, EVA.

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