Q.2210 A bank in Vermont is considering investing in one of four regional factories producing maple syrup. The bank intends to make a decision based on RAROC (risk-adjusted return on capital). The following information is available: | Factory A: | expected revenues of USD 150,000; expected losses of USD 8,000; economic capital of $1,400,000. | |------------|------------------------------------------------------------------------------------------------| | Factory B: | expected revenues of USD 175,000; expected losses of USD 15,000; economic capital of $1,500,000. | | Factory C: | expected revenues of USD 200,000; expected losses of USD 15,000; economic capital of $1,800,000. | | Factory D: | expected revenues of USD 250,000; expected losses of USD 10,000; economic capital of $2,000,000. | On the basis of the risk-adjusted return on capital for each factory, the bank will most likely pick: | Financial Risk Manager Part 2 Quiz - LeetQuiz

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Explanation:

The correct answer is D.

RAROC = $\frac{(\text{expected revenues} - \text{costs} - \text{expected losses} - \text{taxes} + \text{return on risk capital} + / - \text{t})}{\text{economic capital}}$

	Revenues	Expected losses	Economic capital	Calculation
Factory A	150,000	8,000	1,400,000	$\frac{(150,000 - 8,000)}{1,400,000} = 0.10143$
Factory B	175,000	15,000	1,500,000	$\frac{(175,000 - 15,000)}{1,500,000} = 0.10667$
Factory C	200,000	15,000	1,800,000	$\frac{(200,000 - 15,000)}{1,800,000} = 0.10278$
Factory D	250,000	10,000	2,000,000	$\frac{(250,000 - 10,000)}{2,000,000} = 0.12000$

Explanation:

The correct answer is D.

RAROC = $\frac{(\text{expected revenues} - \text{costs} - \text{expected losses} - \text{taxes} + \text{return on risk capital} + / - \text{t})}{\text{economic capital}}$

	Revenues	Expected losses	Economic capital	Calculation
Factory A	150,000	8,000	1,400,000	$\frac{(150,000 - 8,000)}{1,400,000} = 0.10143$
Factory B	175,000	15,000	1,500,000	$\frac{(175,000 - 15,000)}{1,500,000} = 0.10667$
Factory C	200,000	15,000	1,800,000	$\frac{(200,000 - 15,000)}{1,800,000} = 0.10278$
Factory D	250,000	10,000	2,000,000	$\frac{(250,000 - 10,000)}{2,000,000} = 0.12000$

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Q.2210 A bank in Vermont is considering investing in one of four regional factories producing maple syrup. The bank intends to make a decision based on RAROC (risk-adjusted return on capital). The following information is available:

Factory A: expected revenues of USD 150,000; expected losses of USD 8,000; economic capital of `$1`,400,000.
Factory B: expected revenues of USD 175,000; expected losses of USD 15,000; economic capital of `$1`,500,000.
Factory C: expected revenues of USD 200,000; expected losses of USD 15,000; economic capital of `$1`,800,000.
Factory D: expected revenues of USD 250,000; expected losses of USD 10,000; economic capital of `$2`,000,000.

On the basis of the risk-adjusted return on capital for each factory, the bank will most likely pick:

Factory A:	expected revenues of USD 150,000; expected losses of USD 8,000; economic capital of `$1`,400,000.
Factory B:	expected revenues of USD 175,000; expected losses of USD 15,000; economic capital of `$1`,500,000.
Factory C:	expected revenues of USD 200,000; expected losses of USD 15,000; economic capital of `$1`,800,000.
Factory D:	expected revenues of USD 250,000; expected losses of USD 10,000; economic capital of `$2`,000,000.

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Last updated: July 5, 2026 at 07:07

Factory A

Factory B

Factory C

Factory D