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FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities

A firm's surveillance team monitors a trading desk. Last year 400 alerts were generated; 20 were true violations. A new threshold change cuts alerts to 200 and catches 16 of the 20 true violations. Considering only these numbers, which statement is correct?

Precision rose from 5% (20 of 400) to 8% (16 of 200), but detection fell from 100% to 80% because four true violations are now missed. The change cuts false positives yet increases undetected misconduct, so it is not clearly superior.

  1. APrecision rose from 5% to 8% but the share of violations detected fell from 100% to 80%, so compliance risk of undetected misconduct increasedCorrect
  2. BPrecision fell from 8% to 5% and detection rose from 80% to 100%
  3. CBoth precision and detection improved, so the change is clearly superior
  4. DPrecision is unchanged at 5% and detection is unchanged at 100%

Explanation

Before: 20/400 = 5% precision, assuming all 20 were detected (100%). After: 16/200 = 8% precision, detection 16/20 = 80%. The change reduces workload but lets 4 violations go undetected, raising the risk of missed misconduct.

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