Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm


Postby » Wed Sep 17, 2014 8:03 am

Which of the following statements about economic capital is (are) TRUE?
I. The economic capital system provides an appropriate level of capital to meet most potential disasters.
II. The economic capital system ensures that the firm is not overcapitalized.
III. The economic capital system properly manages the risk of the firm.
IV. The economic capital system makes sure capital is efficiently utilized.
A) I only.
B) I, II, III and IV.
C) II and IV.
D) I and III.
Your answer: B was correct!
All of the statements concerning the economic capital system are accurate.

Is second statement correct

Finance Junkie
Posts: 947
Joined: Wed Apr 09, 2014 6:28 am


Postby edupristine » Thu Sep 18, 2014 2:55 pm

There is a confusion in the question: it appears to confuse economic captial with a capital resource rather than the internal capital requirement (ie, a risk measure) and I do agree with you that (II) and (III) are debatable ... the question expects (II) to be true because a "proper" EC system would support this but forgets that regulatory capital is may exceed EC .... the question I guess expects (III) to be true b / c it is refering to a "proper" EC system.

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