504.1. According to the Principles for sound stress testing practices and supervision by BIS, when is stress testing esp

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504.1. According to the Principles for sound stress testing
practices and supervision by BIS,
when is stress testing especially important?
a) When new regulations such as Basel III or Dodd-Frank are
introduced and implemented
b) During periods of expansion or long periods of benign economic
and financial conditions
c) During a corporate transaction such as a merger, especially if
key executive roles are
changing
d) Immediately after a market crisis because the standard models
will be less useful when
systemic input assumptions are depressed
504.2. About stress testing methodologies, BIS writes, "Stress
tests cover a range of
methodologies. Complexity can vary, ranging from simple sensitivity
tests to complex stress
tests, which aim to assess the impact of a severe macroeconomic
stress event on measures
like earnings and economic capital. Stress tests may be performed
at varying degrees of
aggregation, from the level of an individual instrument up to the
institutional level. Stress tests
are performed for different risk types including market, credit,
operational and liquidity risk.
Notwithstanding this wide range of methodologies, the crisis has
highlighted several
methodological weaknesses." According to BIS, which were the
primary WEAKNESSES of
stress testing methodologies during the crisis?
a) Most models relied on historical statistical relationship and
insufficiently aggregated risks
across the firm, often due to infrastructure limitations
b) Too many scenarios were overly complex such that participants
often did not understand
the output; and the output was not communicated in an
easy-to-understand manner
c) Due to lack of general quantitative aptitude at the executive
level, too often the
subjective or qualitative judgment of so-called experts was
utilized instead of objective
data
d) Scenarios tended to emphasize extremely severe market events,
sometimes
exaggerated beyond all realism, and therefore ironically ignored
more plausible but
mundane scenarios
504.3. When developing a stress testing program, according to BIS,
each of the following
elements or component is essential EXCEPT which is not?
a) Reverse stress test
b) System-side interactions and feedback effects
c) Rigorously estimated ex ante probabilities of stress events
based on statistical
relationships
d) Imaginative and forward-looking scenarios informed by the
judgment of experts across
the organization
800.1. In the wake of the global financial crisis (GFC), stress
testing has received prominent
media attention. Siddique and Hasan explain that "stress testing
has many approaches. For
example, at many institutions, finance and treasury have had
ownership of the budgeting
process. Hence, centralized stress testing could be housed in such
a central function. Other
institutions have taken a more decentralized approach, wherein the
central function has only
acted as an aggregator. Effective stress testing does not need a
given organisational form or
approach. However, a given organisational form will require certain
aspects to ensure
effectiveness. For example, in a decentralized approach towards
stress testing, consistency
across the organisation becomes important, and the institution will
need to find ways of ensuring
that consistency."
Each of the following statements is true about stress testing
EXCEPT which is false?
a) Stress testing is a non-statistical risk measure that may employ
scenario analysis as one
approach
b) An acceptable proxy for stress testing is to generate value at
risk (VaR) with a series of
progressively increasing confidence levels; e.g., 99.0%, 99.50%,
99.75%, 99.90%, and
99.99%
c) While backtesting validates model parameter(s) using a large
number of actual,
historical observations; stress testing on the other hand uses a
small number of extreme
movements in market variables
d) Unlike value at risk (VaR) which indicates neither the magnitude
nor shape of extreme
losses beyond the VaR threshold, stress testing DOES attempt to
characterize the
magnitude/shape of the extreme loss tail
800.2. Phillip is developing a "Roles and Responsibilities"
framework for his firm's stress testing
program. His checklist includes the following key
responsibilities:
I. Perform regular reporting of stress-testing results
II. Ensure alignment between firm's risk appetite and stress
testing activities
III. Ensure the firm's stress test exercises are all built on
identical assumptions and utilize
the same information and inputs
IV. Should be at least well-versed, if not expert, in the details
of stress testing and be able to
drill down to discuss technical details and challenge exercise
results on a granular level
Between the board and senior management, who has primary
responsibility of the above
activities?
a) I. Board, II. Management, III. Both, IV. Both
b) I. Board, II. Management, III. Both, IV. Neither
c) I. Management, II. Management, III. Board, IV. Board
d) I. Management, II. Board, III. Neither, IV. Management
800.3. Zotstreet International is an international financial
services firm. The key elements of of
its stress testing program include: (i) a governance structure;
(ii) policies and procedures; (iii)
validation and independent review; and (iv) internal audit. The
firm's stress testing policies are
approved and annually reassessed by the board. The stress test
results are considered directly
for decisions relating to capital and liquidity adequacy, including
capital contingency plans and
contingency funding plan. The firm conducts stress tests
internally, under the direction of the
Chief Risk Officer (CRO) and her staff in the risk management
function, but also retains a thirdparty
vendor to conduct complementary stress tests. The third-party's
approach invokes
proprietary intellectual capital such that the details of their
approach are neither documented nor
available for review by Acme, but the summary results are
disclosed. Management gives the
firm's risk managers (in the risk management function) the
flexibility to conduct ad hoc stress
tests in order to address rapidly emerging risks and
vulnerabilities.
Based on these summary facts, which of the following statements is
most TRUE about
Zotstreet's stress testing program (best answer please)?
a) Zotstreet appears to have a deficiency with respect to
documentation
b) Zotstreet should not be delegating any stress testing to a third
party
c) Zotstreet approach appears to generally reflect best practices
and include all of the key
elements of an effective governance over stress testing
d) Zotstreet approach appears to generally reflect best practices
EXCEPT the board should
re-assess the firm's stress testing policies at least once per
quarter
801.1. Which of the following statements is TRUE about the role
of validation in stress testing
governance?
a) Stress that cannot be fully validated should not be used
b) Stress-test estimates should be continuously backtested against
realized outcomes
because quantitative backtest results are a common, critical
validation metric
c) Expert-based judgement should be applied to ensure that test
results are intuitive and
logical, and to add additional perspective on stress-test
performance
d) If a model fails to perform strongly in the data-rich
environment of a baseline (e.g., good
times) setting, then it cannot be trusted to estimate stressed
outcomes
801.2. Which of the following statements is TRUE about the role of
internal audit in stress
testing governance?
a) Internal audit should independently assess each stress test
used
b) Internal audit is the "first line of defense" in stress testing
governance
c) Internal audit should have have full knowledge of all
stress-test details
d) Internal audit should assess the expertise and roles and
responsibilities of the staff
involved in stress-testing activities
801.3. Key aspects of stress testing governance include coverage,
types (and approaches) and
capital/liquidity. Each of the following is true about these three
general aspects EXCEPT which
of the following statements is inaccurate?
a) Types and approaches: Even if it is difficult to estimate their
likelihood, REVERSE stress
tests that "break the bank" deserve consideration
b) Types and approaches: Scenarios should not be too severe, as
severity may stretch
credibility with shareholders. If the scenario challenges the
institution's viability, then it is
probably too severe
c) Capital and liquidity: Stress testing for capital/liquidity
adequacy should be coordinated
with annual planning cycles and should be refreshed in the event of
a major strategic
decision
d) Coverage: Good stress testing coverage includes (i) inclusion of
portfolios, exposures,
liabilities and business-line activities; (ii) various LEVELS of
the organization; (iii)
interplay between exposures; and (iv) various time horizons
Please do all the questions and not just one
question..... If you can't please leave it for other experts....
Else I will give a downvote.... ans answer only if you are 100%
confident as I am getting many incorrect answers
recently(103).