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Answer: Extremely rare events can happen even if the system is structurally stable.
## Explanation Option A is correct because: - Tail risk refers to the risk of extreme events that occur in the tails of a probability distribution - Even in structurally stable systems, extremely rare events (black swan events) can still occur - The GARP quote mentions that such events can be "very rare and extreme" which supports this concept Option B is incorrect because we do have statistical techniques (e.g., extreme value theory, stress testing) to analyze tail risk, though they have limitations. Option C is incorrect because structural changes can significantly impact expected loss, unexpected loss, and tail risk by changing the underlying risk dynamics. Option D is incorrect because financial markets involve human behavior and complex interactions that make them fundamentally different from natural or mechanical systems.
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About tail risk, GARP observes, "Some risk events have a diabolical side that seems designed to outwit the human mind. This may be because such events are very rare and extreme or they arise from unobserved structural changes in a market." Which of the following statements about tail risk is TRUE?
A
Extremely rare events can happen even if the system is structurally stable.
B
The problem with tail risk is that we lack statistical techniques to help us make the tails visible.
C
Structural change by definition impacts neither expected loss nor unexpected loss nor tail risk.
D
The risk manager can approach tail risk in financial markets in the same way that she would approach a natural or mechanical system.