A bank is considering expanding its asset management operations. The main risk is operational risk. It estimates the expected operational risk loss from the new venture in one year to be $2 million and the 99.9% worst-case loss

(arising from a large investor law suit) to be $40 million. The expected fees it will receive from investors for the funds under administration are $12 million per year and administrative costs are expected to be $3 million per year.

Estimate the before-tax RAROC.

AppendixLO1