Updated: Jun 01, 2026
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1. Which of the following statements is true:
I. Expected credit losses are charged to the unit's P&L while unexpected losses hit risk capital reserves.
II. Credit portfolio loss distributions are symmetrical
III. For a bank holding $10m in face of a defaulted debt that it acquired for $2m, the bank's legal claim in the bankruptcy court will be $10m.
IV. The legal claim in bankruptcy court for an over the counter derivatives contract will be the notional value of the contract.
A) I, II and IV
B) III and IV
C) I and III
D) II and IV
2. Fill in the blank in the following sentence:
Principal component analysis (PCA) is a statistical tool to decompose a ____________ matrix into its principal components and is useful in risk management to reduce dimensions.
A) Volatility
B) Covariance
C) Correlation
D) Positive semi-definite
3. For a given mean, which distribution would you prefer for frequency modeling where operational risk events are considered dependent, or in other words are seen as clustering together (as opposed to being independent)?
A) Poisson
B) Negative binomial
C) Binomial
D) Gamma
4. Which of the following statements are true:
I. Common scenarios for stress tests include the 1997 Asian crisis, the Russian default in 1998 and other well known economic stress situations.
II. Stress tests provide the assurance that an institution's worst case losses will be covered.
III. Performing stress tests is highly recommended but is not mandated under Basel II.
IV. Historical events can be modeled quite accurately as they have defined start and end dates.
A) I and II
B) I, III and IV
C) I only
D) All of the above
5. If two bonds with identical credit ratings, coupon and maturity but from different issuers trade at different spreads to treasury rates, which of the following is a possible explanation:
I. The bonds differ in liquidity
II. Events have happened that have changed investor perceptions but these are not yet reflected in the ratings III. The bonds carry different market risk IV. The bonds differ in their convexity
A) I, II and IV
B) III and IV
C) I and II
D) II and IV
Solutions:
| Question # 1 Answer: C | Question # 2 Answer: D | Question # 3 Answer: B | Question # 4 Answer: C | Question # 5 Answer: C |
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