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NEW QUESTION: 1
An operational loss severity distribution is estimated using 4 data points from a scenario. The management institutes additional controls to reduce the severity of the loss if the risk is realized, and as a result the estimated losses from a 1-in-10-year losses are halved. The 1-in-100 loss estimate however remains the same.
What would be the impact on the 99.9th percentile capital required for this risk as a result of the improvement in controls?
A. The capital required will decrease
B. The capital required will stay the same
C. Can't say based on the information provided
D. The capital required will increase
Answer: D
Explanation:
Explanation
This situation represents one of the paradoxes in estimating severity that one needs to be aware of - the improvement in controls reduces the weight of the body/middle of the distribution and moves it towards the tails (as the total probability under the curve must stay at 100%) and the distribution becomes more heavy tailed. As a result, the 99.9th percentile loss actually increases. instead of decreasing, creating a counterintuitive result. Therefore the correct answer is that the capital required will increase.
If scenario analysis produces such a result, the analyst must question if the 1 in 100 year loss severity is still accurate. If the new control has reduced the severity in the body of the distribution, the question as to why the more extreme losses have not changed should be raised.

NEW QUESTION: 2

A. Option C
B. Option A
C. Option D
D. Option B
Answer: D

NEW QUESTION: 3
If one says that the particular control or monitoring tool is sustainable, then it refers to what ability?
A. The ability to adapt as new elements are added to the environment
B. The ability to be applied in same manner throughout the organization
C. is incorrect. This is not valid definition for defining sustainability of al tool.
D. The ability to protect itself from exploitation or attack
E. Explanation:
Sustainability of the controls or monitoring tools refers to its ability to function as expected over
time or when changes are made to the environment.
F. is incorrect. Sustainability ensures that controls changes with the conditions, so as not
to fail in any circumstances. Hence this in not valid answer.
G. The ability to ensure the control remains in place when it fails
Answer: A
Explanation:
is incorrect. This in not valid answer.