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Answer: Loss severity and loss frequency are often modeled with lognormal and Poisson distributions, respectively
The correct answer is B. Loss severity and loss frequency are often modeled with lognormal and Poisson distributions, respectively. Economic capital is intended to cover the worst-case loss scenario, not just the expected loss, which makes option A incorrect. Operational loss data from vendors are typically biased towards large losses rather than small ones, which contradicts option C. Lastly, under the standardized approach for calculating operational risk capital, banks do not need to estimate unexpected losses, which makes option D incorrect. In the standardized approach, banks categorize their activities into different business lines and calculate a beta factor for each. This approach focuses on expected losses and does not require the estimation of unexpected losses, aligning with the correct answer provided.
Author: LeetQuiz Editorial Team
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In the context of an interview for an operational risk analyst position at a prominent bank, the Chief Risk Officer (CRO) is evaluating the suitability of a prospective candidate. Which statement made by the candidate about the evaluation of operational risk would be considered correct?
A
Economic capital of a bank should be sufficient to cover both the expected and the worst-case operational risk losses of the bank.
B
Loss severity and loss frequency are often modeled with lognormal and Poisson distributions, respectively
C
Operational loss data available from data vendors tend to be biased toward small losses but are particularly useful in determining loss frequency.
D
The standardized approach used by banks in calculating operational risk capital requires the calculation of unexpected as well as expected losses.
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