Crouhy, Chapter 17: Risk Capital Attribution and Risk-Adjusted Performance Measurement Study Notes covers 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.
After reviewing the notes you will be able to apply what you learned with practice questions and answers.
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