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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank scores each RCSA risk on a 1-5 scale for likelihood and a 1-5 scale for impact, and defines the risk score as likelihood multiplied by impact. Control effectiveness is rated as a percentage reduction of the inherent score. A process risk has likelihood 4 and impact 5. Controls are rated 60% effective. The bank's tolerance for residual score is 6. What is the residual score and is it within tolerance?

The inherent score is 4 times 5, which is 20. A 60% effective control leaves 40% of it, giving a residual score of 8. That exceeds the tolerance of 6, so the risk is outside tolerance and needs further treatment.

  1. AResidual score 8; outside toleranceCorrect
  2. BResidual score 12; outside tolerance
  3. CResidual score 8; within tolerance
  4. DResidual score 4; within tolerance

Explanation

Inherent score = 4 x 5 = 20. Residual = 20 x (1 - 0.60) = 8. Since 8 exceeds the tolerance of 6, it is outside tolerance. A score of 12 comes from wrongly using 40% as the reduction, and 4 from applying the reduction to a wrong base.

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