Explanation:
Let's analyze each option:
A. Incorrect: Economic capital should cover unexpected losses, not expected losses. Expected losses should be covered by provisions and pricing, while economic capital covers unexpected losses.
B. Incorrect: While loss severity is often modeled with heavy-tailed distributions (like lognormal, Weibull, or Pareto), loss frequency is typically modeled with Poisson or negative binomial distributions, not lognormal distributions.
C. Incorrect: Operational loss data from vendors tends to be biased towards large losses rather than small losses, as small losses are often not reported or captured in external databases.
D. Correct: The standardized approach does indeed assign different beta factors to different business lines, reflecting the varying operational risk profiles across different banking activities.
Correct Answer: D
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Which of the following statements concerning the measurement of operational risk is correct?
A
Economic capital should be sufficient to cover both expected and worst-case operational risk losses.
B
Loss severity and loss frequency tend to be modeled with lognormal distributions.
C
Operational loss data available from data vendors tend to be biased towards small losses.
D
The standardized approach used by banks in calculating operational risk capital allows for different beta factors to be assigned to different business lines.
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