Answer: III and IV only

## Explanation Model risk refers to the risk of financial loss resulting from using models that are incorrectly specified, misapplied, or based on flawed assumptions. In the Long-Term Capital Management (LTCM) case: - **I. Poor management oversight** - This is an operational risk issue, not model risk. It relates to governance and control failures rather than model deficiencies. - **II. Financial reporting standards** - This is a regulatory/accounting issue, not model risk. Financial reporting standards govern how financial information is presented, not the underlying models used for risk management. - **III. Ignoring autocorrelation of economic shocks** - This is a classic model risk. LTCM's models assumed that economic shocks were independent over time, but in reality, financial crises often exhibit persistence (autocorrelation) where negative events cluster together. - **IV. Underestimating correlations among asset classes during economic crises** - This is another key model risk. LTCM's models assumed stable correlations between different asset classes, but during the 1998 Russian debt crisis, correlations converged toward 1 as investors fled to quality assets, causing massive losses in supposedly diversified portfolios. Therefore, only options III and IV represent actual model risk issues demonstrated in the LTCM case.

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