Crouhy, Chapter 17: Risk Capital Attribution and Risk-Adjusted Performance Measurement Practice Question set contains 25 pages covering the following learning objectives:
* Define, compare and contrast risk capital, economic capital and regulatory capital, and explain methods and motivations for using economic capital approaches to allocate risk capital.
* Describe the RAROC (risk-adjusted return on capital) methodology and its use in capital budgeting.
* Compute and interpret the RAROC for a project, loan, or loan portfolio, and use RAROC to compare business unit performance.
* Explain challenges that arise when using RAROC for performance measurement, including choosing a time horizon, measuring default probability, and choosing a confidence level.
* Calculate the hurdle rate and apply this rate in making business decisions using RAROC.
* Compute the adjusted RAROC for a project to determine its viability.
* Explain challenges in modeling diversification benefits, including aggregating a firm’s risk capital and allocating economic capital to different business lines.
* Explain best practices in implementing an approach that uses RAROC to allocate economic capital.
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