Arm 401 Exam Practice 425 Questions And Answers

Diversified Products Company (DPC) is considering adding a new product line. DPC requires such ventures to provide a risk-adjusted return on capital of 14%. The new product line is expected to generate revenues of $40 million and expenses of $10 million. The pure risk charge for this product line will be $2 million, and the risk-free rate is 4%. How much economic capital would have to be allocated to this new product line to earn a risk-adjusted return of 14% on this investment? A. $120 million B. $160 million C. $220 million D. $280 million {Ans: D: 14% = [$40,000,000 − $10,000,000 − $2,000,000 + (.04 x $280,000,000)] ÷ $280,000,000 RAROC = (Revenue - Expense - Expected Loss + Income from capital)/economic capital}Carla Meyers is an independent insurance agent. She specializes in personal lines coverages and coverage for small businesses. One of her clients is Metro Candy Company. The retailer is a candy store that makes all its products at the store. Metro Candy Company developed a devoted group of customers, and the store decided to begin to offer its candy to on-line customers through a web site. The owner asked Carla if the businessowners policy covering Metro Candy