CFE 101: Capital allocation is a decision rule, not a natural constant
Stand-alone risks and allocated contributions to aggregate capital are different quantities. The allocation method embeds assumptions about dependence and the intended use of capital.
Original practice scenario
Compare two hypothetical business lines with equal stand-alone volatility but different dependence on the existing portfolio. Explain why their marginal contributions can differ. Then state whether the allocation supports pricing, performance measurement or risk limits; one method need not suit every purpose.
Study check
Write the assumptions, the decision being supported and one limitation. Use the current course syllabus for the required terminology and scope; this introductory guide is not a complete course summary.
Reading sources
ActNet editorial guide · October 1, 2026 · Original illustrative examples.