Question 26.8: A bank is considering expanding its asset management operati...

A bank is considering expanding its asset management operations. The main risk is operational risk. It estimates the expected operational risk loss from the new venture in one year to be $2 million and the 99.97%  VaR (arising from a small chance of an large investor lawsuit) to be $40 million. The expected fees it will receive from investors for the funds under administration are $12 million per year, and administrative costs are expected to be $3 million per year. Estimate the before-tax RAROC.