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1. Which of the following best describes operational risk?
A) Risk of market price movements affecting portfolio value
B) Risk of losses due to inadequate internal processes, people, or
systems
C) Risk of default by a counterparty
D) Risk of regulatory changes affecting valuation
Answer: B
Operational risk arises from failures in internal processes, people, or
systems, and includes fraud, errors, and IT failures.
2. Scenario analysis is most useful for:
A) Measuring historical performance of assets
B) Stress testing under extreme but plausible conditions
C) Estimating expected returns on an investment
D) Predicting exact future losses
Answer: B
Scenario analysis allows risk managers to assess potential losses
under extreme but plausible situations, unlike simple historical
measures.
3. Which of the following is an example of reputational risk?
A) Losses due to market volatility
B) Negative publicity causing client withdrawals
C) Fraudulent trading within the firm
D) Currency fluctuations
,Answer: B
Reputational risk is the potential for loss due to damage to an
organization’s reputation, which can result in client attrition or
regulatory scrutiny.
4. In operational risk modeling, the Loss Distribution Approach
(LDA) typically requires:
A) Only qualitative assessments
B) Historical loss data and frequency/severity modeling
C) Market price data
D) Only scenario analysis
Answer: B
LDA models operational risk by fitting distributions to historical loss
data and simulating potential future losses.
5. Key risk indicators (KRIs) are primarily used to:
A) Predict market returns
B) Monitor risk exposure levels
C) Calculate expected loss in credit portfolios
D) Forecast economic cycles
Answer: B
KRIs are metrics used to monitor risks before they result in actual
losses, providing early warning signs.
6. Which of the following best defines liquidity risk?
A) Risk that assets cannot be sold without significant loss
B) Risk of system failure
C) Risk of political instability
D) Risk of interest rate changes
,Answer: A
Liquidity risk arises when an institution cannot easily sell assets at
fair market value to meet obligations.
7. Which approach estimates operational risk capital using internal
and external loss data, scenario analysis, and business environment
factors?
A) Standardized Approach
B) Advanced Measurement Approach (AMA)
C) Internal Ratings-Based Approach
D) Historical Simulation
Answer: B
AMA combines multiple sources of information to estimate
operational risk capital in a comprehensive manner.
8. In risk management, the difference between stress testing and
scenario analysis is:
A) Stress testing uses extreme conditions; scenario analysis can be
moderate
B) Scenario analysis uses historical data only
C) Stress testing predicts exact losses
D) Scenario analysis ignores operational risks
Answer: A
Stress testing often uses extreme but plausible conditions, while
scenario analysis can include a range of plausible future scenarios.
9. Which risk management tool measures the maximum loss over a
specified period at a given confidence level?
A) Expected Shortfall
B) Value at Risk (VaR)
, C) Credit Exposure
D) Key Risk Indicator
Answer: B
VaR estimates the maximum potential loss at a certain confidence
level over a defined time horizon.
10. Expected Shortfall differs from VaR in that it:
A) Measures the worst-case loss in all scenarios beyond VaR
B) Ignores tail risks
C) Uses only historical averages
D) Is not used in regulatory frameworks
Answer: A
Expected Shortfall (ES) provides the average of losses exceeding the
VaR threshold, capturing tail risk.
11. Which of the following is considered a primary risk in the
context of PRM Part IV?
A) Credit risk
B) Operational risk
C) Liquidity risk
D) All of the above
Answer: D
PRM Part IV focuses on multiple primary risks including credit,
operational, and liquidity risks.
12. The “three lines of defense” model in risk management
includes:
A) Risk owners, risk managers, internal auditors
B) Regulators, auditors, external consultants