8008 Exam Dumps | Economic capital under the Earnings Volatility approach is calculated as:

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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
PRMIA.8008.v2021-08-28.q125
Question 4

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Question 4/125

Economic capital under the Earnings Volatility approach is calculated as:

A. Expected earnings/Specific risk premium for the firm

B. [Expected earnings less Earnings under the worst case scenario at a given confidence level]/Required rate of return for the firm

C. Earnings under the worst case scenario at a given confidence level/Required rate of return for the firm

D. Expected earnings/Required rate of return for the firm

Correct Answer: B

Explanation
The Earnings Volatility approach to calculating economic capital is a top down approach that considers economic capital as being the capital required to make for the worst case fall in earnings, and calculates EC as equal to the worst case decrease in earnings capitalized at the rate of return expected of the firm. The worst case decrease in earnings, or the earnings-at-risk can only be stated at a given confidence level, and is equal to the Expected Earnings less Earnings under the worst case scenario.

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