Suppose that the economic capital estimates for two business units

Suppose that the economic capital estimates for two business units are

The correlation between market risk and credit risk in the same business unit is 0.3. The correlation between credit risk in one business unit and credit risk in another is 0.7. The correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?



Transcribed Image Text:

Business Units 1 2 Market Risk 10 50 Credit Risk 30 30 Operational Risk 50 10