Suppose that the economic capital estimates for two business units are: Risk Business Units   1 2 Market Risk 10 50 Credit Risk 30 30 Operational Risk 50 10   The correlation between market risk and...

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Suppose that the economic capital estimates for two business units are:

Risk

Business Units

 

1

2

Market Risk

10

50

Credit Risk

30

30

Operational Risk

50

10

 

The correlation between market risk and credit risk in the same business unit is 0.3. The correlation between credit risk in one business unit and credit risk in another is 0.7. The correlation between market risk in one business unit and market risk in the other is 0.2. All the correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?

 

    • 10 years ago
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