Statistics Risk Assessment & Management 5

Question 1

An analyst uses a 99% one-day VaR of $1 million. Under Basel III, the minimum capital requirement multiplier applied to this VaR for market risk is typically:

Accepted Answer

3×

Answer

Basel III requires banks to hold capital equal to at least 3 times the 99% 10-day VaR (the multiplication factor) to buffer against model risk.

Question 2

Which graphical tool plots cumulative probability of loss on one axis and loss amount on the other to display the full loss distribution?

Accepted Answer

Cumulative Distribution Function (CDF) plot

Answer

A CDF plot of losses shows, for any loss value, the probability that losses will not exceed that amount, enabling VaR and ES to be read directly.

Question 3

In Failure Mode and Effects Analysis (FMEA), the Risk Priority Number (RPN) is calculated as:

Accepted Answer

Severity × Occurrence × Detection

Answer

RPN = Severity × Occurrence × Detection, where each factor is rated on a scale (typically 1–10), with higher scores indicating higher priority for corrective action.

Question 4

Operational risk under Basel II/III is defined as the risk of loss from:

Accepted Answer

Inadequate processes, people, systems, or external events

Answer

The Basel Committee defines operational risk as arising from failures in internal processes, human error, system failures, or external events such as natural disasters.

Question 5

A loss severity distribution is modeled with a lognormal model. If the underlying normal variable has μ = 10 and σ = 1, the median loss is:

Accepted Answer

e¹⁰ ≈ $22,026

Answer

For a lognormal distribution, the median equals e^μ (not e^(μ+σ²/2), which is the mean), so median = e^10 ≈ $22,026.

Statistics Practice Test

Statistics Practice Test

Statistics Risk Assessment & Management 5