2016-FRR Exam Dumps | Which of the following statements about a bank's behavior regarding Risk Adjusted Return on Capital (RAROC)

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GARP.2016-FRR.v2025-06-21.q161
Question 18

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Question 18/161

Which of the following statements about a bank's behavior regarding Risk Adjusted Return on Capital (RAROC) is correct?
I. A bank should always seek to maximize their overall RAROC.
II. A bank should consider investing in a business even with negative RAROC if it increases the RAROC of the bank as a whole.
III. A bank should minimize its overall RAROC by controlling the absolute and relative amount of risk of its businesses.
IV. A bank should maximize its RAROC by always investing in a new business that maximizes the RAROC for that business unit.

A. I and II

B. II and IV

C. I, II and III

D. II, III, and IV

Correct Answer: A

A bank's behavior regarding RAROC should consider:
* Maximizing overall RAROC: This ensures that the bank is efficiently managing its capital and generating the highest possible returns relative to the risks taken.
* Investing in a business even with negative RAROC if it increases the RAROC of the bank as a whole: This can be beneficial if the investment contributes to the diversification or other strategic goals that enhance the bank's overall risk-return profile.
These principles guide banks in optimizing their capital allocation and improving their financial performance.

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