Group Model Development: Lets Test Your Model Development Skill !!!!

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Ash

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Quizzes Created: 1 | Total Attempts: 207

Questions: 10 | Attempts: 211 | Updated: Jan 31, 2023

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Group Model Development: Lets Test Your Model Development Skill !!!! - Quiz

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Questions and Answers

1.

Which of the following statement best defines “Model Risk” accurately
- A.
  
  The risk of a model that does not perform the tasks or capture the risks it was designed to.
- B.
  
  The risk of losses due to the failure of a borrower/counterparty to meet its repayment obligation.
- C.
  
  The risk faced due to the movement of macroeconomic factors and interest rate of derivatives.
- D.
  
  The risk of a change in value caused by the fact of actual losses, incurred for inadequate or failed internal processes, people and systems.
Correct Answer
A. The risk of a model that does not perform the tasks or capture the risks it was designed to.

Explanation
Model Risk refers to the risk associated with using a model that fails to perform its intended tasks or accurately capture the risks it was designed for. This means that the model may not provide reliable or accurate results, leading to potential losses or incorrect decision-making. It highlights the importance of ensuring that models are properly designed, validated, and regularly monitored to mitigate the risk of relying on faulty or ineffective models.

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2.

Risk models provide a framework to assist bank personnel to assess available information and reach decisions in an objective, consistent and efficient manner
- A.
  
  True
- B.
  
  False
Correct Answer
A. True

Explanation
Risk models are tools used by banks to evaluate and analyze available information in order to make informed decisions. These models provide a structured framework that helps bank personnel assess and quantify risks in a consistent and efficient manner. By using risk models, banks can objectively evaluate potential risks, identify mitigation strategies, and make decisions based on reliable data and analysis. Therefore, the statement that risk models provide a framework to assist bank personnel in assessing available information and reaching decisions in an objective, consistent, and efficient manner is true.

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3.

The basics of risk model development comprised of:
- A.
  
  Design
- B.
  
  Development
- C.
  
  Implementation
- D.
  
  Validation
Correct Answer(s)
A. Design
B. Development
C. Implementation

Explanation
The basics of risk model development consist of four steps: design, development, implementation, and validation. Design involves planning and outlining the objectives, scope, and methodology of the risk model. Development is the process of creating the model, including data collection, analysis, and modeling techniques. Implementation refers to integrating the model into the organization's systems and processes. Validation involves testing and evaluating the model's accuracy, reliability, and effectiveness. These four steps are essential in building a robust and effective risk model.

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4.

The discriminatory power of a model is typically captured by ...............................
- A.
  
  Accuracy ratio
- B.
  
  Model stability
- C.
  
  LGD Parameter Assessment
- D.
  
  Governance
Correct Answer
A. Accuracy ratio

Explanation
The discriminatory power of a model is typically captured by the accuracy ratio. This ratio measures the model's ability to correctly classify instances into their respective categories. A higher accuracy ratio indicates a more effective and powerful model in distinguishing between different classes.

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5.

Value At Risk (VAR) defined as .............. from normal market movements within a given a confidence level and holding period.
- A.
  
  Potential Loss
- B.
  
  Potential Gain
- C.
  
  Potential Capital Deficit
- D.
  
  Potential Operating Profit
Correct Answer
A. Potential Loss

Explanation
VAR is a measure used in risk management to estimate the potential loss that an investment or portfolio may face within a given confidence level and holding period. It helps investors and financial institutions understand the maximum amount they could lose from normal market movements. Therefore, the correct answer is "Potential Loss."

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6.

Based on Basel II Capital Adequacy Framework, the risk components to be estimated under the Advanced IRB Approach are:
- A.
  
  Probability of Default
- B.
  
  Operating Profit
- C.
  
  Loss Given Default
- D.
  
  Total Equity
Correct Answer(s)
A. Probability of Default
C. Loss Given Default

Explanation
The correct answer is Probability of Default and Loss Given Default. According to the Basel II Capital Adequacy Framework, the Advanced Internal Ratings-Based (IRB) approach requires the estimation of these two risk components. Probability of Default refers to the likelihood of a borrower defaulting on their obligations, while Loss Given Default represents the potential loss that would be incurred if a borrower defaults. These two components are crucial in determining the capital requirements for credit risk under the Advanced IRB approach.

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7.

Accuracy ratio is a statistical metric to measure the risk-ranking ability and discriminatory power of a factor or model.State the region with perfect discriminatory power.
- A.
  
  1
- B.
  
  2
- C.
  
  3
- D.
  
  None of the above
Correct Answer
A. 1

Explanation
The answer is 1 because it is stated that the region with perfect discriminatory power is being asked. Since there is no mention of any specific regions or factors, it can be inferred that none of the above options can be the correct answer. Therefore, the correct answer is 1.

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8.

The credit risk components for capital calculation under Advanced Internal Ratings Based (AIRB) approach are Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD) and Facility Risk Rating (FRR).
- A.
  
  True
- B.
  
  False
Correct Answer
B. False

Explanation
The statement is false because the credit risk components for capital calculation under the Advanced Internal Ratings Based (AIRB) approach are Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD). Facility Risk Rating (FRR) is not one of the credit risk components used in the AIRB approach.

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9.

Based on Market Risk-Value At Risk(VAR) Methodology,.....................uses a model that takes random numbers as inputs for future asset/portfolio returns/prices. The process is repeated many times (hundreds to thousands of times) to obtain a probability distribution that is then used to calculate the VaR.
- A.
  
  Monte Carlo Simulation
- B.
  
  Historical Simulation (HS)
- C.
  
  Variance
- D.
  
  Covariance
Correct Answer
A. Monte Carlo Simulation

Explanation
Monte Carlo Simulation is a methodology used in Market Risk-Value At Risk (VAR) to calculate VaR. It involves using a model that takes random numbers as inputs for future asset/portfolio returns/prices. The process is repeated multiple times to obtain a probability distribution, which is then used to calculate VaR. This method allows for the incorporation of various factors and uncertainties in the market, providing a more comprehensive and accurate estimation of risk.

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10.

What should be the frequency of the model validation
- A.
  
  At least annually
- B.
  
  Once in every 2 years
- C.
  
  Once in every 3 years
- D.
  
  No need to be validated
Correct Answer
A. At least annually

Explanation
The model validation should be done at least annually to ensure that the model is accurate and up-to-date. By conducting regular validations, any potential errors or biases in the model can be identified and corrected in a timely manner. This helps to maintain the reliability and effectiveness of the model in making accurate predictions or decisions. Waiting for longer intervals, such as once in every 2 or 3 years, increases the risk of using an outdated or faulty model. Therefore, regular validation is necessary to ensure the model's ongoing performance.

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Current Version
Jan 31, 2023

Quiz Edited by
ProProfs Editorial Team
Nov 12, 2018

Quiz Created by
Ash

Group Model Development: Lets Test Your Model Development Skill !!!!

Which of the following statement best defines “Model Risk” accurately

Risk models provide a framework to assist bank personnel to assess available information and reach decisions in an objective, consistent and efficient manner

The basics of risk model development comprised of:

The discriminatory power of a model is typically captured by ...............................

Value At Risk (VAR) defined as .............. from normal market movements within a given a confidence level and holding period.

Based on Basel II Capital Adequacy Framework, the risk components to be estimated under the Advanced IRB Approach are:

Accuracy ratio is a statistical metric to measure the risk-ranking ability and discriminatory power of a factor or model.State the region with perfect discriminatory power.

The credit risk components for capital calculation under Advanced Internal Ratings Based (AIRB) approach are Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD) and Facility Risk Rating (FRR).

What should be the frequency of the model validation