CORES CORES Model Risk & Quantitative Methods 2

Question 1

What is the main limitation of relying solely on internal loss data for operational risk capital modeling?

Accepted Answer

Internal loss history may be too short or lack sufficient large-loss observations, underestimating tail risk

Answer

Internal data is too expensive to collect

Answer

Regulators prohibit the use of internal loss data

Answer

Internal data always overestimates capital requirements

Question 2

How does the use of external loss data address the limitations of internal data in operational risk modeling?

Accepted Answer

External data supplements internal data to improve the estimation of low-frequency, high-severity loss distributions

Answer

External data replaces internal data entirely in all models

Answer

External data is used only for regulatory reporting, not modeling

Answer

External data eliminates the need for scenario analysis

Question 3

What is a Monte Carlo simulation used for in operational risk quantification?

Accepted Answer

To generate thousands of random loss scenarios by sampling from frequency and severity distributions to estimate aggregate loss distributions

Answer

To physically simulate office environments for business continuity testing

Answer

To audit vendor contracts for financial terms

Answer

To automatically approve risk models for regulatory submission

Question 4

Which of the following is a key governance control for managing model risk in a financial institution?

Accepted Answer

Maintaining a comprehensive model inventory with periodic validation and performance monitoring

Answer

Requiring all models to be built by the same team

Answer

Using only vendor-supplied models without internal review

Answer

Restricting model use to the IT department

Question 5

What does 'backtesting' a risk model involve?

Accepted Answer

Comparing model predictions or outputs against actual historical outcomes to assess accuracy

Answer

Rebuilding the model from scratch each quarter

Answer

Testing the model on data from a competitor institution

Answer

Requiring the model to pass a physical hardware performance test

Question 6

In operational risk, what does 'fat-tail' or 'heavy-tail' distribution refer to?

Accepted Answer

A loss distribution with a higher-than-normal probability of extreme, large-magnitude losses

Answer

A loss distribution where most losses cluster near the mean with very few extremes

Answer

A standard normal distribution used in credit risk

Answer

A distribution exclusively used in market risk modeling