[ 2009 FRM Sample Exam ] Operational and Integrated risk management Q22 measures, business, adjusted, following, management

Abey

 

22. Which of the following measures is the most suitable for performance measurement of a derivatives trading business unit?

A. Internal rate of return

B. Return on asset

C. Sharpe ratio

D. Risk adjusted return on capital

moliya

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[此贴子已经被作者于2009-8-27 17:38:55编辑过]

裙角飞扬

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fenghai

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Abey

 

Correct answer is Dfficeffice" />

A is incorrect.  Internal rate of return is often used to measure the return on a capital budgeting decision.  It is the interest rate that sets the NPV of the investment equal to zero.

B is incorrect.  Return on asset is used to measure the performance of a firm.  It can be used to measure the performance of a business unit but it does not adjust for risk.  ROA is based on revenues and net income of the business unit.

C is incorrect.  The Sharpe ratio measures the expected risk premium of a portfolio relative to its variability (i.e. (Expected return ? risk free rate)/standard deviation).

D is correct.  Risk adjusted return on capital measures the net economic profit of a unit divided by the capital allocated to the business unit.  RAROC helps to determine whether the firm's' capital is sufficient to support all of it risk.  It also helps to determine whether a business unit is producing a reasonable return relative to its risk profile.