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Questions 4

When compared to a high severity low frequency risk, the operational risk capital requirement for a low severity high frequency risk is likely to be:

Questions 5

Which of the following statements are true:

I. The set of UoMs used for frequency and severity modeling should be identical

II. UoMs can be grouped together into larger combined UoMs using judgment based on the knowledge of the business

III. UoMs can be grouped together into combined UoMs using statistical techniques

IV. One may use separate sets of UoMs for frequency and severity modeling

Questions 7

Which of the following statements are true?

I. Retail Risk Based Pricing involves using borrower specific data to arrive at both credit adjudication and pricing decisions

II. An integrated 'Risk Information Management Environment' includes two elements - people and processes

III. A Logical Data Model (LDM) lays down the relationships between data elements that an organization stores

IV. Reference Data and Metadata refer to the same thing

Questions 8

Which of the following is true in relation to the application of Extreme Value Theory when applied to operational risk measurement?

I. EVT focuses on extreme losses that are generally not covered by standard distribution assumptions

II. EVT considers the distribution of losses in the tails

III. The Peaks-over-thresholds (POT) and the generalized Pareto distributions are used to model extreme value distributions

IV. EVT is concerned with average losses beyond a given level of confidence

Questions 9

Under the standardized approach to determining operational risk capital, operations risk capital is equal to:

Questions 11

According to the Basel II framework, subordinated term debt that was originally issued 4 years ago with amaturity of 6 years is considered a part of:

Questions 12

Which of the following is a measure of the level of capital that an institution needs to hold in order to maintain a desired credit rating?

Questions 13

A corporate bond maturing in 1 year yields 8.5% per year,while a similar treasury bond yields 4%. What is the probability of default for the corporate bond assuming the recovery rate is zero?

Questions 14

Pick underlying risk factors for a position in an equity index option:

I. Spot value for the index

II. Risk free interest rate

III. Volatility of the underlying

IV. Strike price for the option

Questions 15

Which of the following statements is true:

I. Confidence levels for economic capital calculations are driven by desired credit ratings

II. Loss distributions for operational risk are affected more by theseverity distribution than the frequency distribution

III. The Advanced Measurement Approach (AMA) referred to in the Basel II standard is a type of a Loss Distribution Approach (LDA)

IV. The loss distribution for operational risk under the LDA (Loss Distribution Approach) is estimated by separately estimating the frequency and severity distributions.

Questions 16

Which of the following is not a parameter to be determined by the risk manager that affects the level of economic credit capital:

Questions 18

Which of the following is not a limitation of the univariate Gaussian model to capture the codependence structure between risk factros used for VaR calculations?

Questions 19

Under the contingent claims approach to measuring credit risk, which of the following factors does NOT affect credit risk:

Questions 20

What isthe risk horizon period used for credit risk as generally used for economic capital calculations and as required by regulation?

Questions 22

The CDS quote for the bonds of Bank X is 200 bps. Assuming a recovery rate of 40%, calculate the default hazard rate priced in the CDS quote.

Questions 23

When combining separate bottom up estimates of market, credit and operational risk measures, a most conservative economic capital estimate results from which of the following assumptions:

Questions 24

Loss from a lawsuit from an employee due to physical harm caused while at work is categorized per Basel II as:

Questions 25

The unexpected loss for a credit portfolio at a given VaR estimate is definedas:

Questions 26

There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon. If the default correlation is 25%, what is the one year expected loss on this portfolio?

Questions 27

If P be the transition matrix for 1 year, how can we find the transition matrix for 4 months?

Questions 28

If the marginal probabilities of default for a corporate bond for years 1, 2 and 3 are 2%, 3% and 4% respectively, what is the cumulative probability of default at the end of year 3?

Questions 29

Which of the following will be a loss not covered by operational risk as defined under Basel II?

Questions 30

Which of the following are valid approaches for extreme value analysis given a dataset:

I. The Block Maxima approach

II. Least squares approach

III. Maximum likelihood approach

IV. Peak-over-thresholds approach

Questions 31

Which of the following statements are true:

I. A high score according to Altman's Z-Score methodology indicates a lower default risk

II. A high score according to theProbit or Logit models indicates a higher default risk

III. A high score according to Altman's Z-Score methodology indicates a higher default risk

IV. A high score according to the Probit or Logit models indicates a lower default risk

Questions 32

Which of the following are valid methods for selecting an appropriate model from the model space for severity estimation:

I. Cross-validation method

II. Bootstrap method

III. Complexity penalty method

IV. Maximum likelihood estimation method

Questions 33

Company A issues bonds with a face value of$100m, sold at $98. Bank B holds $10m in face of these bonds acquired at a price of $70. Company A then defaults, and the recovery rate is expected to be 30%. What is Bank B's loss?

Questions 35

Which of the following are considered properties of a 'coherent' risk measure:

I. Monotonicity

II. Homogeneity

III. Translation Invariance

IV. Sub-additivity

Questions 36

For a given mean, which distribution would you prefer for frequency modeling where operational risk events are considered dependent, or in other words are seen as clustering together (as opposed to being independent)?

Questions 37

Whichof the following statements are true in relation to Historical Simulation VaR?

I. Historical Simulation VaR assumes returns are normally distributed but have fat tails

II. It uses full revaluation, as opposed to delta or delta-gamma approximations

III. Acorrelation matrix is constructed using historical scenarios

IV. It particularly suits new products that may not have a long time series of historical data available

Questions 38

Under the credit migration approach to assessing portfolio credit risk, which of the following are needed to generate adistribution of future portfolio values?

Questions 40

The frequency distribution for operational risk loss events can be modeled by which of the following distributions:

I. The binomial distribution

II. The Poisson distribution

III. The negative binomial distribution

IV. The omega distribution

Questions 42

The difference between true severity and the best approximation of the true severity is called:

Questions 44

Which of the following need to be assumed to convert a transition probability matrix for a given time period to the transition probability matrix for another length of time:

I. Time invariance

II. Markov property

III. Normal distribution

IV. Zero skewness

Questions 45

Which of the following best describes the concept of marginalVaR of an asset in a portfolio:

Questions 46

Which of the following belong to the family of generalized extreme value distributions:

I. Frechet

II. Gumbel

III. Weibull

IV. Exponential

Questions 47

For a bank using the advanced measurement approach to measuring operational risk, which of the following brings the greatest 'model risk' to its estimates:

Questions 48

If the full notional value of a debt portfolio is $100m, its expected value in a year is $85m, and the worst value of the portfolio in one year's time at 99% confidence level is $60m, then what is the credit VaR?

Questions 49

Which of the following statements is true:

I. When averaging quantiles of two Pareto distributions, the quantiles of theaveraged models are equal to the geometric average of the quantiles of the original models based upon the number of data items in each original model.

II. When modeling severity distributions, we can only use distributions which have fewer parameters thanthe number of datapoints we are modeling from.

III. If an internal loss data based model covers the same risks as a scenario based model, they can can be combined using the weighted average of their parameters.

IV If an internal loss model and a scenario based model address different risks, the models can be combined by taking their sums.

Questions 51

For a back office function processing 15,000 transactions a day with an error rate of 10 basis points, what is the annual expected loss frequency (assume 250 days in a year)

Questions 52

Under the KMV Moody's approach to credit risk measurement, how is the distance to default converted to expected default frequencies?

Questions 53

Which of the following is not a permitted approach under Basel II for calculating operational riskcapital

Questions 54

The generalized Pareto distribution, when used in the context of operational risk, is used to model:

Questions 55

Under the CreditPortfolio View approach to credit risk modeling, which of the following best describes the conditional transition matrix:

Questions 57

The probability of default of a security during the first year after issuance is 3%, that during the second and third years is 4%, and during the fourth year is 5%. What is the probability that it would not have defaulted at the end of four years from now?

Questions 58

Which of the following are true:

I. The total of the component VaRs for all components of a portfolio equals the portfolio VaR.

II. The total of the incremental VaRs for each position in a portfolio equals the portfolio VaR.

III. Marginal VaR and incremental VaR are identical for a $1 change in the portfolio.

IV. The VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than (or in extreme cases equal to) the sum of the individual VaRs.

V. The component VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than the sum of the individual component VaRs.

Questions 60

If the default hazard rate for a company is 10%, and the spread on its bondsover the risk free rate is 800 bps, what is the expected recovery rate?

Questions 61

All else remaining the same, an increase in the joint probability of default between two obligors causes the default correlation between the two to:

Questions 62

Which of the following formulae describes CVA (Credit Valuation Adjustment)? All acronyms have their usual meanings (LGD=Loss Given Default, ENE=Expected Negative Exposure, EE=Expected Exposure, PD=Probability of Default, EPE=Expected Positive Exposure, PFE=Potential Future Exposure)

Questions 63

The capital adequacy ratio applied to risk weighted assets for the calculation of capital requirements for credit risk per Basel II is:

Questions 64

When fitting a distribution in excess of a threshold as part of the body-tail distribution method described by the equation below, how is the parameter 'p' calculated.

Here, F(x) is the severity distribution. F(Tail) and F(Body) are the parametric distributions selected for the tail and the body, and T is the threshold in excess of which the tail is considered to begin.

Questions 66

The key difference between 'top down models' and 'bottom up models' foroperational risk assessment is:

Questions 67

If E denotes the expected value of a loan portfolio at the end on one year and U the value of the portfolio in the worst case scenario at the 99% confidence level, which of the following expressions correctly describes economic capital requiredin respect of credit risk?

Questions 68

Which of the following are valid approaches to leveraging external loss data for modeling operational risks:

I. Both internal and external losses can be fitted with distributions,and a weighted average approach using these distributions is relied upon for capital calculations.

II. External loss data is used to inform scenario modeling.

III. External loss data is combined with internal loss data points, and distributions fitted to the combined data set.

IV. External loss data is used to replace internal loss data points to create a higher quality data set to fit distributions.

Questions 69

Which of the following statements are true:

I. Heavy tailed parametricdistributions are a good choice for severity modeling in operational risk.

II. Heavy tailed body-tail distributions are a good choice for severity modeling in operational risk.

III. Log-likelihood is a means to estimate parameters for a distribution.

IV. Body-tail distributions allow modeling small losses differently from large ones.

Questions 70

Which of the beloware a way to classify risk governance structures:

A Reactive, Preventative and Active

B. Committee based, regulation based and board mandated

C. Top-down and Bottom-up

D. Active and Passive

Questions 72

Which of the following statements are true:

I.Top down approaches help focus management attention on the frequency and severity of loss events, while bottom up approaches do not.

II. Top down approaches rely upon high level data while bottom up approaches need firm specific risk data to estimate risk.

III. Scenario analysis can help capture both qualitative and quantitative dimensions of operational risk.