Free Operational Risk Manager (ORM) Exam 8010 Exam Practice Test

Economic capital under the Earnings Volatility approach is calculated as:

• Expected earnings/Specific risk premium for the firm
• [Expected earnings less Earnings under the worst case scenario at a given confidence level]/Required rate of return for the firm
• Earnings under the worst case scenario at a given confidence level/Required rate of return for the firm
• Expected earnings/Required rate of return for the firm

If E denotes the expected value of a loan portfolio at the end on one year and U the value of the portfolio in the worst case scenario at the 99% confidence level, which of the following expressions correctly describes economic capital required in respect of credit risk?

• E - U
• U/E
• U
• E

Which loss event type is the failure to timely deliver collateral classified as under the Basel II framework?

• Clients, products and business practices
• External fraud
• Information security
• Execution, Delivery & Process Management

Under the basic indicator approach to determining operational risk capital, operational risk capital is equal to:

• 15% of the average gross income (considering only the positive years) of the past three years
• 15% of the average net income (considering only the positive years) of the past three years
• 25% of the average gross income (considering only the positive years) of the past three years
• 15% of the average gross income of the past five years

When combining separate bottom up estimates of market, credit and operational risk measures, a most conservative economic capital estimate results from which of the following assumptions:

• Assuming that the resulting distributions have a correlation between 0 and 1
• Assuming that market, credit and operational risk estimates are perfectly positively correlated
• Assuming that market, credit and operational risk estimates are perfectly negatively correlated
• Assuming that market, credit and operational risk estimates are uncorrelated

Which of the following is not a permitted approach under Basel II for calculating operational risk capital

• the internal measurement approach
• the basic indicator approach
• the standardized approach
• the advanced measurement approach

Which of the following credit risk models relies upon the analysis of credit rating migrations to assess credit risk?

• KMV's EDF based approach
• The CreditMetrics approach
• The actuarial approach
• The contingent claims approach

Which of the following are true:1. The total of the component VaRs for all components of a portfolio equals the portfolio VaR.2. The total of the incremental VaRs for each position in a portfolio equals the portfolio VaR.3. Marginal VaR and incremental VaR are identical for a $1 change in the portfolio.4. The VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than (or in extreme cases equal to) the sum of the individual VaRs.5. The component VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than the sum of the individual component VaRs.

• 2 and 5
• 2 and 4
• 1 and 2
• 1, 3 and 4

Which of the following cannot be used as an internal credit rating model to assess an individual borrower:

• Distance to default model
• Probit model
• Logit model
• Altman's Z-score

A stock that follows the Weiner process has its future price determined by:

• its expected return alone
• its expected return and standard deviation
• its standard deviation and past technical movements
• its current price, expected return and standard deviation