Answer-first summary for fast verification
Answer: Statement 3: Economic capital is designed to measure how much shareholders' equity could be required to meet tail risk losses.
Statement 3 is correct. Economic capital measures the amount of capital needed to absorb unexpected losses at a given confidence level, particularly tail risk losses that could threaten the firm's solvency. Statement 1 describes stop-loss limits, not capital allocation. Statement 2 is incorrect as capital allocation can be used with leveraged portfolios.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
Which of the following statements about market risk management and capital allocation is most accurate?
A
Statement 1: In market risk management, capital allocation requires a reduction in the size of a portfolio, or its complete liquidation, when a loss of a particular size occurs in a specified period.
B
Statement 2: Capital allocation cannot be used if leverage is used by the portfolio.
C
Statement 3: Economic capital is designed to measure how much shareholders' equity could be required to meet tail risk losses.
No comments yet.