2. a) b) Define risk-adjusted return on economic capital (RAROC). You are asked to estimate the RAROC of a bank's $350 million loan business. The economic capital is invested and earns 4.0% and its VAR risk measure is 5.5% annually. The average interest rate of the loan business is 10%. All loans have the same probability of default of 1.0% with a loss given default of 50%. The operating costs and funding costs are $7.5 million and $25.5 million, respectively. Based on the given information, calculate the RAROC of the bank's loan business. [Total: 6 marks)