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Consider a loan portfolio of $100 million principal which pays an annual rate of 8%. The economic capital against such a loan is estimated to

Consider a loan portfolio of $100 million principal which pays an annual rate of 8%. The economic capital against such a loan is estimated to be $6.5 million (i.e. 6.5% of the loan). The capital can be invested in government securities returning 2.5% per annum. The $100 million should be raised by deposits with an interest rate of 5%. The bank has an operating cost of $1.5 million per annum. The expected loss on this portfolio is assumed to be 0.5% per annum.

Please calculate the RAROC for this loan portfolio.

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