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FRM Part II · FRM Exam Part II · Sound Management of Risks Related to Money Laundering and Financing of Terrorism

A bank's transaction monitoring system generates 2,000 alerts in a month. Investigation shows that 100 are genuinely suspicious, but the system also missed 50 suspicious cases that were found through other channels. Which statement is correct?

The true-positive share of alerts is 5% (100 of 2,000), and the detection rate is about 67% because 100 of the 150 total suspicious cases were caught. This shows high false positives alongside meaningful missed cases, indicating tuning is needed.

  1. AThe share of alerts that were true positives is 5%, and the system detected about 67% of all suspicious casesCorrect
  2. BThe share of alerts that were true positives is 5%, and the system detected 50% of all suspicious cases
  3. CThe share of alerts that were true positives is 10%, and the system detected about 67% of all suspicious cases
  4. DThe share of alerts that were true positives is 2.5%, and the system detected 100% of cases

Explanation

Precision = 100/2,000 = 5%. Total suspicious cases = 100 detected + 50 missed = 150, so detection rate (recall) = 100/150 = 66.7%. Using 50/100 for recall mistakenly compares the misses with detected cases, and 10% uses the wrong denominator.

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