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Answer: 2.73%
The question appears to be related to the calculation and interpretation of the Risk-Adjusted Return on Capital (RAROC) for a project, loan, or loan portfolio. RAROC is a measure used to assess the risk-adjusted profitability of a financial institution's activities. It is calculated by dividing the income generated by a risk position by the economic capital allocated to that position. In the provided content, there is a calculation of RAROC with the following values: - The income generated by the risk position is JPY 11,457,600. - The economic capital allocated to the risk position is JPY 420,000,000. The RAROC is calculated as follows: \[ \text{RAROC} = \frac{\text{Income}}{\text{Economic Capital}} = \frac{11,457,600}{420,000,000} = 0.0273 \text{ or } 2.73\% \] The content also mentions that certain answers are incorrect due to various reasons: - Answer A is incorrect because it uses an incorrect economic capital value of JPY 4.2 billion instead of 10% of the loan amount. - Answer C is incorrect because it ignores taxes in the calculation. - Answer D is incorrect because it adds instead of subtracting the income contribution (IC) in the numerator. The correct RAROC, as calculated, is 2.73%, which indicates that for every unit of economic capital invested, the risk position generates a return of 2.73%. This metric is used to compare the performance of different business units by taking into account the risk associated with their activities. It is important to use the correct economic capital, consider taxes, and properly account for income contributions to ensure an accurate RAROC calculation.
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In the context of determining the Risk-Adjusted Return on Capital (RAROC) for financial institutions, consider the following scenario: You are provided with an economic capital amount and a corresponding loan amount. Your task is to recalculate the RAROC accurately. As you compute it, you must discern and select the correct RAROC value, ensuring that you exclude any options that feature errors stemming from the incorrect use of economic capital, omission of taxes, or incorrect mathematical operations in the numerator.
A
0.27% is the result obtained when the economic capital is incorrectly taken to be JPY 4.2 billion instead of it being 10% of the loan amount.
B
2.73%
C
4.40% is the result obtained when taxes are ignored.
D
10.73% is the result obtained when IC is added instead of subtracting in the numerator.