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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 unit's incremental capital shows an unusually large figure when a new, concentrated position is added. Which explanation best fits the incremental (marginal) capital approach?

Incremental capital is the change in total firm capital from adding the position, so it depends on the existing portfolio. A concentrated position that overlaps with current exposures raises firm risk more, producing a larger incremental capital figure.

  1. AIt measures the change in firm capital from adding the position, so concentration relative to the existing portfolio raises itCorrect
  2. BIt is independent of the existing portfolio composition
  3. CIt always equals stand-alone capital
  4. DIt is computed using only the position's notional

Explanation

Incremental capital is the difference in firm capital with and without the position, so it depends on the existing portfolio. A concentrated position correlated with current holdings adds more capital. It does not equal stand-alone capital except with perfect correlation.

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