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Answer: The operational risk loss distribution is symmetric and fat-tailed
The correct answer is B. Operational risk loss distribution is typically characterized by a large number of small losses and a smaller number of large losses, which results in an asymmetric and fat-tailed distribution. This is in contrast to market and credit risk distributions, which are often symmetric and can also be fat-tailed. The observation that the operational risk loss distribution is symmetric and fat-tailed would be unexpected when compared to similar industry data. This is because operational risks encompass a wide variety of events that can lead to losses, such as fraud, legal issues, and system failures, which are inherently diverse and unpredictable, leading to an asymmetric distribution. The reference provided by Brian Nocco and Rene Stulz in the Journal of Applied Corporate Finance supports the understanding of the development and implementation of an Enterprise Risk Management (ERM) system, highlighting the importance of accurately categorizing and assessing different types of risks, including operational risks, to effectively manage them within an organization.
Author: LeetQuiz Editorial Team
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As a risk analyst tasked with developing an enterprise risk management system for a bank, you have categorized the bank's risks into market, credit, and operational risk categories. Considering this classification and comparing the bank's data to industry standards within the same sector, which of the following observations would be considered atypical?
A
The operational risk loss distribution has many small losses, and therefore a relatively low mode
B
The operational risk loss distribution is symmetric and fat-tailed
C
The credit risk distribution is asymmetric and fat-tailed
D
The market risk distribution is symmetric
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