FRM Part II · FRM Exam Part II · Risk Identification
A bank's RCSA scores likelihood and impact each on a 1-5 scale, and the risk score is likelihood times impact. Controls reduce the score by their effectiveness percentage. A fraud risk has likelihood 4 and impact 5. The control is rated 60% effective. What is the residual score, and what is a key limitation of this approach?
The residual score is 8: inherent 4 x 5 = 20, and a 60% effective control leaves 40%, giving 8. The limitation is that ordinal ratings and subjective effectiveness percentages create false precision and do not represent exact expected losses.
- A8; the ordinal scales and multiplication give a false precision and the effectiveness percentage is subjectiveCorrect
- B12; because controls reduce only the likelihood by 60%
- C8; because the scores are cardinal and so represent exact expected loss in currency
- D20; because controls do not change a multiplicative score
Explanation
Inherent score is 4 x 5 = 20. A 60% effective control leaves 40%, so 20 x 0.4 = 8. Ordinal scores multiplied together imply false precision, and the effectiveness percentage is judgmental. Option 12 wrongly assumes 40% was removed instead of 60%, and 20 ignores controls.
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