2011 CFA Sample Exam Session 1 Q 28 - Risk management/budgting

Why the A is incorrect? Since the VAR is same, they should have the same risk budgets. ( Book 5, p 261)

regarding B, I think fixed income desk generates better return on the allocation of capital, but worse return on the VAR, correct?

is my understanding right?

thanks in advance

2011 CFA Sample Exam Session 1 Q 28 - Risk management/budgting—??

Session 1 means AM??

Sample exam = Mock ??

oh… 2011 Sample Exam, not Mock. And since there are two session exams in the mock, session one means the first 30 questions. :slight_smile:

repost to raise your attention, thx

If you are asked for risk budgeting, it could be just VAR. But here it’s VAR and capital. Yes, A could be correct in some sense, but CFAI’s exam answer can’t never be that STRAIGHTFORWARD…Any way, C is the best answer.

FI desk

Allocated capital = 200, profit = 25 (25/200 = 12.5%), VAR = 5 ( 5 /200 = 2.50% of allocated capital)

FX desk

Allocated capital = 100, profit = 20 (20/100 = 20%), VAR = 5 (5/100 = 5% of allocated capital)

Close down FX desk & allocate capital to FI desk

Allocated capital = 200+100 = 300, profit = 12.5% of 300 = 37.50, VAR = 2.5% of 300 = 7.50

Hence lower return on capital but a higher return on VAR

Note: There is a confirmed errata on the page.