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16、The measurement of which of the following risks is least developed?

A) Credit risk.
 
B) Market risk.
 
C) Operational risk.
 
D) Business risk.

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 The correct answer is C

The measurement of operational risk is the least developed of the risks facing most firms.

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17、Operational risk is defined as all of the following EXCEPT:

A) risk of breakdown in normal operations.
 
B) financial risk that is not caused by market risk.
 
C) risk of default by a foreign customer.
 
D) risk of fraud.

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The correct answer is C

Operational risk does not include default risk, which would be considered credit risk.

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18、The risks that will have the largest impact on the capital charge for operational risk are:

A) low-frequency, low-severity risks.
 
B) high-frequency, low-severity risks.
 
C) high-frequency, high-severity risks.
 
D) low-frequency, high-severity risks.

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The correct answer is D

The risks that will have the most impact on the capital charge for operational risk are the low-frequency, high-severity risks.

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AIM 2: List and describe examples of top-down models for measuring operational risk.

 

1、Residual variance is an estimate of operational risk in which of the following models?

A) Connectivity models.
 
B) Multi-factor models.
 
C) Scenario analysis. 
 
D) Reliability models.

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 The correct answer is B

Residual variance is the proportion of variation in the dependent variable of a regression that is left unexplained by the independent variables. A multi-factor model is a top-down approach to measuring operational risk that uses macroeconomic factors to explain a firm’s stock returns. What is left unexplained by the model is considered aggregate operational risk. Scenario analysis is a top-down approach that does not use regression analysis. Reliability and connectivity models are bottom-up approaches.

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2、Which of the following models does NOT use regression analysis to measure operational risk by relating a financial variable to macroeconomic variables?

A) Multi-factor models. 
 
B) Income-based models. 
 
C) Expense-based models.
 
D) Risk-profiling models.

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 The correct answer is D

Risk profiling models relate performance indicators to control indicators to identify operational weaknesses. As such, they are not in the class of top-down approaches that relate macroeconomic factors to financial variables. For example, multi-factor models regress stock returns against macroeconomic factors. The residual variance from this regression measures the unexplained variance that is attributable to operational risk. Income-based models and expenses-based models are similar in that they relate measures of income or expenses to macroeconomic factors.