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3、In the context of measuring operational risk, operating leverage models:

A) relate changes in normalized expenses to macroeconomic risk variables through regression analysis. 
 
B) measure the change in the relationship between variable costs and total assets. 
 
C) speculate about a set of possible catastrophic events. 
 
D) are relatively subjective.

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 The correct answer is B

 

Operating leverage models measure the risk that variable operating costs will increase by more than their historical relation to asset growth would suggest. Although they are a class of expense-based models in some sense, they do not relate expenses to macroeconomic factors. They are relatively objective (not subjective) and do not capture reputational considerations or the opportunity costs. Scenario analysis speculates about a set of possible catastrophic events.

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4、Which of the top-down approaches of measuring operational risk focus on LFHS?

A) Risk Profiling Models.
 
B) Scenario Analysis.
 
C) Operating Leverage Models.
 
D) Multifactor Models.

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 The correct answer is B

Scenario Analysis is unique among top-down approaches focusing on LFHS events that have not occurred yet.

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AIM 3: List and describe examples of bottom-up models for measuring operational risk.

 

1、The primary focus of Extreme Value Theory (EVT) is the notion that:

A) large losses occur more frequently than many assumed distributions suggest. 
 
B) low frequency, high severity losses are more common than losses of more moderate magnitude.
 
C) the risk of extreme events is defined by the percentile established by a predetermined confidence interval.
 
D) the possibility of extreme events is sufficiently small that it can safely be ignored.

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 The correct answer is A

EVT recognizes that the empirical distribution of losses contains “fat tails”. That is, extremely large losses are more frequent than many assumed distributions suggest. It therefore, develops special methods for examining risk in this part of the distribution. Rather than estimating downside risk using the value at risk, say, the 99% confidence interval, EVT estimates the expected value of losses beyond the 99% percentile – an approach the generally yields greater estimates of catastrophic risks.

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2、Which of the following models analyze operational risk by deconstructing a process into individual steps and analyzing each step’s risk or each step’s relation to other steps?

  I. Causal Networks.
 II. Fishbone Analysis.
III. Extreme Value Theory.
IV. Empirical Loss Distributions.
A) II and IV only. 
 
B) I and III only.
 
C) I, II, III, and IV.
 
D) I and II only. 

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The correct answer is D

The question describes process approaches, as opposed to actuarial approaches, to developing bottom-up models for operational risk analysis. Empirical loss distributions examine historical loss data rather than focusing on processes, while extreme value theory focuses on analyzing the tails of a distribution that contain low-frequency, high-severity events. Causal networks, by contrast, dissect a process into sequential steps that can be examined individually. Also a process approach, fishbone analysis is a type of connectivity model that determines the different causes of losses or errors in each step of the process.

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3、“Convolution” means:

A) projecting frequency and severity probability distributions into independent losses over a time period.
 
B) analyzing frequency and severity loss data with regression analysis techniques.
 
C) reducing loss frequency and severity through a coordinated risk-management program.
 
D) combining frequency and severity probability distributions into independent losses over a time period.

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The correct answer is D

Convolution means combining frequency and severity probability distributions into independent losses over a time period.