1.Economic capital estimates for risks in 2 business units ($millions) are as follows:

MarketCredit Operational

Unit 11005040

Unit 24003020

Within a given unit, _MC=0.6, _MO=0.2 and _CO=0.4 (subscripts identify risks). Between units, _MM=0.8, _CC=0.4 and all other correlations are 0.

a.Calculate total economic capital for each business unit.

b.Calculate total economic capital for the company.

c.Allocate the economic capital in Part b to the business units using the incremental capital method.