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AIM 5: Compare various approaches to weigh risk data and scenario information.

 

1、Bill Stevens, FRM and Vivian Lamb, FRM, are discussing how to use a data set in the loss distribution approach (LDA). They agree that most of the observations will receive an equal weight, but they wish to consider some possible exceptions. Stevens recommends their placing a lower weight on older losses. Lamb recommends their placing a lower weight on external losses obtained from a commercial loss data base. Which of the two recommendations, if either, are acceptable under standard LDA?

A) Both recommendations.
 
B) Neither recommendations.
 
C) The recommendation of Stevens but not that of Lamb.
 
D) The recommendation of Lamb but not that of Stevens.

nayizhenfeng

The correct answer is A

In modeling the distribution, the analyst will assign an equal weight to all data points. There are three exceptions: split losses, old losses, and external losses in the commercial loss data base and scenarios. Old losses should receive a lower weight. One method is to give full weight to losses in the past five years and decrease the weight to zero in a linear fashion over years six to 25. External data and scenarios may require scaling because of inherent biases.

nayizhenfeng

AIM 6: Describe the derivation of frequency distributions in loss distribution models.

 

1、In the loss distribution approach (LDA), the calibration process for the frequency distributions of losses usually chooses any of the distributions from the following list except the:

A) chi-square (χ2) distribution. 
 
B) negative binomial distribution.
 
C) binomial distribution.
 
D) Poisson distribution.

nayizhenfeng

The correct answer is A

The chi-square distribution is used to test how closely the selected distribution (Poisson, binomial, etc.) fits the actual data.

nayizhenfeng

AIM 3: Discuss what data sources should be incorporated in a valid loss distribution model.

 

1、With respect to valid data that can be incorporated in a loss distribution approach model for a given firm, which of the following is most accurate?

A) One firm may not have sufficient internal loss data for modeling a loss distribution, the loss distribution approach typically requires obtaining data from external sources such consortium loss data and data from commercial data bases.
 
B) One firm may not have sufficient internal loss data for modeling; thus, along with the internal actual data, a firm may only use the data from a few select firms that resemble the firm being analyzed. 
 
C) One firm usually has sufficient internal loss data for modeling; therefore, only internal actual data may be used, but under certain circumstances simulated data using the statistics of the internal data can be used.
 
D) One firm usually has sufficient internal loss data for modeling; therefore, only internal actual data may be used.

nayizhenfeng

The correct answer is A

Because one firm may not have sufficient internal loss data for modeling a loss distribution, the loss distribution approach typically requires obtaining data from external sources. External data sources include the consortium loss data from The Operational Riskdata eXchange Association (ORX), loss data from the commercial data base OpVantage, which is a subsidiary of Fitch Risk, and data generated from scenarios specified by experts in divisions, control and support functions, and regions.

nayizhenfeng

The correct answer is C

The loss distribution approach (LDA) approach has several steps. One of them is group the data in a business line/event type matrix that corresponds to the model. The overall operation risk capital requirement for the firm would combine the results in each of the cell in such a way that takes into account the fact that the losses would not be perfectly correlated.