Okay I built this small spreadsheet (because trying to talk about this soon becomes a word soup imo), please see https://www.dropbox.com/s/ikhbkm0571fdchh/1019-garp-frm-scoring-exam.xlsx?dl=0
... and below is a snapshot. This is just for P1 and you only input (change) the yellow cells, the rest is calculated.
Notice how I input an extreme version of the one you referenced in your email; i.e., Student #1 earns 3/3/2/2 and passes while Student #2 earns 2/2/3/3 but fails. I was deliberately provocative: notice how the seemingly subtle difference can lead to a difference between a final score of 62 and 36 (wow!). Caveat: I'm not sure my quantiles are exactly calibrated, but they can't be too far off. I hope that clarifies!
This is absolutely correct. I choose the same answer.This is how I calculated -
A. PD in Year 1 = 1-e^(-0.12) = 11.30%
B. Cumulative PD in Year 2 = 1-e^(-2x0.12) = 21.33%
Hence, PD in Year 2 = A - B = 21.33 - 11.30 = 10.03%
Now, Conditional PD = 10.03/.887 = 11.3%
This is the answer for all years.
The question on the after tax risk adjusted return on capital, we were given expected loss, unexpected loss and economic capital. I had not seen unexpected loss in any RAROC problem earlier so this one threw me off. Given that we are told the unexpected loss value, are we obliged to use it in the RAROC calculation?
From other threads in the forum, I could find a discussion between unexpected loss and economic capital with economic capital = alpha * unexpected loss. Who exactly decides this alpha?
worst case loss = expected loss + unexpected loss
why don't we use worst case loss instead of expected loss in the RAROC calculation?