Hi there I have 2 questions on chapter 12: 1) On page 29 of chapter 12 the last sentence of 4.2 states that the overall capital for a company will not be the same as the sum of the individual marginal capital requirements of individual risks. Firstly, does this imply that the overall company capital will be less than the sum of the marginal capital of the individual risks (because of diversification)? Secondly, is the only reason for this statement diversification or is there something else? 2) On page 28 of chapter 12 in 4.2 it also states that marginal capital for an activity can be negative? How is this possible? Or is it meant to refer to deposit-taking activities? Kind regards Stefan
1) On page 29 of chapter 12 the last sentence of 4.2 states that the overall capital for a company will not be the same as the sum of the individual marginal capital requirements of individual risks. Firstly, does this imply that the overall company capital will be less than the sum of the marginal capital of the individual risks (because of diversification)? Secondly, is the only reason for this statement diversification or is there something else? I think this does only refer to the fact that capital or each business would come out higher in total than the capital for the company as a whole. Diversification is the only reason. 2) On page 28 of chapter 12 in 4.2 it also states that marginal capital for an activity can be negative? How is this possible? Or is it meant to refer to deposit-taking activities? I dont think this refers to deposit taking activities. If a company has 4 businesses and it is thinking of adding a 5th. It is possible that the capital required for the 4 businesses is greater than the capital required for all 5 businesses. For example if the new business had a beneficial diversification effect on the whole business. If this is the case your marginal capital could be negative.
