Explanation:
Comment I is incorrect: A robust stress-testing framework must be applied across multiple levels, including business line, portfolio, and risk type levels, as well as on an enterprise-wide basis. Excluding enterprise-wide stress testing fails to capture the aggregate risk profile and correlations across the entire institution.
Comment II is correct: Stress testing must cover varied and relevant time horizons. It should evaluate immediate, short-term shocks, but also longer-term, protracted adverse scenarios that may take time to fully materialize.
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Q.97 An investment bank has hired external consultants to review its stress testing procedures. After a month of thorough investigations, the consultants came up with the following comments:
I. The bank has ensured an appropriate coverage in stress-testing activities, as the stress testing is applied to the business line, portfolio, and risk type levels, and not on an enterprise-wide basis.
II. Stress testing should be conducted over various relevant time horizons. The bank should concentrate not on conditions that may materialize in the near term but also on adverse situations that take longer to develop.
Which of the comments is (are) correct?
A
Comment I only
B
Comment II only
C
Neither of the comments is correct
D
Both comments are correct
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