Skip to content

FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

Which statement about economic capital models used for risk aggregation is most accurate?

Economic capital is the internal capital buffer sized to absorb unexpected losses, measured at a chosen confidence level and time horizon, often tied to a target credit rating. Expected losses are handled through pricing and provisions, and it differs from regulatory capital.

  1. AEconomic capital is set by regulators and cannot differ from regulatory capital
  2. BEconomic capital is the buffer sized to cover unexpected losses at a chosen confidence level over a set horizonCorrect
  3. CEconomic capital covers only expected losses, which are absorbed by provisions
  4. DEconomic capital models avoid the need to specify a confidence level

Explanation

Economic capital is an internal estimate of the capital needed to absorb unexpected losses at a chosen confidence level and horizon, linked to the target credit rating. Expected losses are covered by pricing and provisions. Regulatory capital is a separate measure.

Did you get it right without looking?

One question tells you little. A timed set on Enterprise Risk Management and Future Trends shows your real accuracy, how long you take and where you lose marks.

Practise Enterprise Risk Management and Future TrendsFree diagnostic mock

More Enterprise Risk Management and Future Trends questions