Hi @RobKing I think the disconnect is that your first test should be "but - adjusted RAROC is RAROC - beta(rm-rf) = 17%-1.5(12%-4%) = 5% > risk-free rate." So you would accept. As discussed above and where this first caused confusion is that GARP (Crouhy) proposed two ARAROC tests, neither of which is terribly intuitive to me both correctly itemized by @Maged above. Using the 2016 practice exam question P2.30 assumptions of RAROC = 17.0%, Rf = 4.0%, β=1.50, and R(m) = 12%:
It remains easiest, for me, to simply calculate the (Jensen's) alpha of the RAROC. In this case, Jensen's alpha = 17.0% - 4.0% - 1.50* (12.0%-4.0%) = +1.0%; i.e., above the SML, so to speak, and therefore "accept." I hope that clarifies!
- Previous: ARAROC = ( RAROC - Rf ) / Beta => to be compared with Rm-Rf. In this case, (17.0% - 4.0%)/1.50 = 8.67% which is greater than 8.0% = R(m) - Rf = 12.0% - 4.0%
- Current: ARAROC = RAROC - Beta (Rm - Rf ) => to be compared with Rf. In this case, 17.0% - 1.5*(12.0% - 4.0%) = 5.00% which is greater than the riskfree rate of 4.0%.
I have a question on the correct formula for calculating Adjusted RAROC ?
Bionic Turtle says : Adjusted RAROC=(RAROC-R_F)/Beta
Schweser says: Adjusted RAROC=RAROC-Beta*(E(R_m)-R_f)[/QUOT
[email protected]. thanks for your quick response. I am still trying to familiarize myself with the forum. But once again thanks