The frequency distribution for operational risk loss events can be modeled by which of the following distributions:

The frequency distribution for operational risk loss events can be modeled by which of the following distributions:

I. The binomial distribution

II. The Poisson distribution

III. The negative binomial distribution

IV. The omega distribution
A . I, II and III
B . I and III
C . I, III and IV
D . I, II, III and IV

View Answer

Answer: A

Explanation:

The binomial, Poisson and the negative binomial distributions can all be used to model the loss event frequency distribution. The omega distribution is not used for this purpose, therefore Choice ‘a’ is the correct answer.

Also note that the negative binomial distribution provides the best model fit because it has more parameters than the binomial or the Poisson. However, in practice the Poisson distribution is most often used due to reasons of practicality and the fact that the key model risk in such situations does not arise from the choice of an incorrect underlying distribution.