Answer: It uses a 10-day horizon for market risk.

## Explanation The incorrect statement is **B. It uses a 10-day horizon for market risk.** ### Analysis of Each Option: **A. It assumes market, credit, and operational risks have zero correlation.** - **CORRECT** statement about the problem. Simply adding up regulatory capital for different risk types implicitly assumes zero correlation between them, which is unrealistic as these risks may be correlated in reality. **B. It uses a 10-day horizon for market risk.** - **INCORRECT** statement. The 10-day horizon is actually the standard regulatory requirement for market risk VaR calculations under Basel frameworks. This is not a problem with the approach but rather a regulatory standard. **C. It ignores strategic risks.** - **CORRECT** statement about the problem. Regulatory capital requirements under Basel frameworks do not explicitly cover strategic risks, so this approach would indeed ignore them. **D. It ignores the interest risk associated with the bank's loans.** - **CORRECT** statement about the problem. Interest rate risk in the banking book (IRRBB) is typically not covered by the market risk capital requirements and would be ignored in this simple additive approach. ### Key Insight: The question asks which statement is **incorrect** about the problems with this approach. Statement B describes a regulatory standard (10-day horizon for market risk) rather than a problem with the approach itself. The other statements correctly identify limitations of simply adding up regulatory capital across different risk types.

Author: LeetQuiz .