hard · FRM Part 1
A firm aggregates two business units with standalone economic capital of $400 million and $600 million.
If the units are perfectly negatively correlated (ρ = -1), what is the aggregate capital, and is this state achievable between two distinct credit and market risk types?
- 200 million; No, perfect negative correlation is generally not possible between genuine risk types.
- 0 million; Yes, through synthetic hedging structures.
- 1,000 million; No, the benefit would be additive.
- 200 million; Yes, this is the standard assumption for Enterprise Risk Management.
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