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6、Which of the following characterize extreme value theory (EVT)?

Focuses on catastrophic losses that are more likely than standard distributions suggest.
Uses a different distribution to describe losses in the right tail.
Most commonly uses a lognormal distribution in the tails.
Estimates expected losses beyond an established confidence interval.
A) I and III only.
 
B) I and IV only.
 
C) I, II, and IV only.
 
D) II and III only.

nayizhenfeng

 The correct answer is C

EVT incorporates the notion that extreme losses are more likely than standard distribution would suggest. In other words, empirical distributions often have "fatter" tails than assumed distributions. EVT therefore treats the tails of assumed distributions differently than the rest of the distribution by assuming this region follows a different distribution, such as the generalized Pareto distribution (most common). Rather than estimating losses up to, say, the 99th percentile as in value-at-risk (VAR) analysis, EVT estimates the expected value of the losses beyond the 99th percentile in the "fat" tail of the distribution. This approach yields estimates of operational risk that are much larger than standard VAR approaches.

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AIM 4: List and describe ways a firm can hedge against catastrophic operational losses.

 

1、Which of the following help insurance companies to manage the moral hazard problem associated with insuring operational risks?

  I. Deductibles.
 II. Reinsurance.
III. Co-insurance.
IV. Diversification.

A) I and III only. 
 
B) II and III only. 
 
C) II and IV only. 
 
D) I, II, III, and IV. 

nayizhenfeng

The correct answer is D

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

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4、The two variables that are modeled in probability distribution functions of operational risk are loss:

A) frequency and loss severity. 
 
B) type and loss severity.
 
C) frequency and loss cause.
 
D) frequency and loss type. 

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 The correct answer is A

The two variables that are modeled in probability distribution functions of operational risk are loss frequency and loss severity.

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5、Referring to the bottom-up models for measuring operational risk, how many of the actuarial models use a standardized distribution to estimate one or several components of operational risk? How many of the actuarial models focus on LFHS?

A) 2; 2.
 
B) 2; 1.
 
C) 1; 2.
 
D) 1; 1.

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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.

nayizhenfeng

 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.