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Explanation:
Economic Capital (EC) is typically derived as a multiple of Unexpected Loss (UL). Specifically, , where is the Capital Multiplier. The Capital Multiplier depends on the chosen confidence level and the assumed probability distribution of credit losses. Thus, economic capital is a multiple of unexpected loss.
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507.1. Which best describes the relationship between economic capital and unexpected loss?
A
Economic capital is a multiple of unexpected loss
B
Economic capital is unrelated to unexpected loss
C
Economic capital is equal to (synonymous with) unexpected loss
D
Economic capital is unexpected loss plus credit value at risk (CVaR)