Module 15 - Introduction to risk modelling

Question 1

Issues with risk quantification

Answer 1

Data limitation
Interdependency of risks
Unquantifiable risks
Extreme events

Question 2

Outline the disadvantages and advantages of Linear correlation (Pearson’s rho)

Answer 2

Ad-Correlation coefficient is unchanged under increasing linear transformations
Disad
Coefficient changes if not increasing transformations
Can’t be used for infinite variance
P=0 doesn’t always mean no correlation unless if linear
Valid for joint elliptical distributions
Linear correlations depend on both the joint distribution and the marginal distributions

Question 3

Steps to follow for scenario analysis

Answer 3

Determine the scenarios of interest
Check how the scenarios affect the risk factors and run the model for overall effect
Take action, check how to limit the effect on the risk factors of the scenario, early warning indicators
Review scenarios to keep them relevant