FRM Part II · FRM Exam Part II · Backtesting VaR
A risk manager explains why the Basel yellow zone is treated with discretion rather than automatic penalties. Which statement best captures the rationale?
The yellow zone exists because exception counts of five to nine can plausibly arise from both a sound model and a flawed one. Supervisors therefore weigh Type 1 and Type 2 errors and use judgment on causes, rather than assuming the model is wrong.
- AIn the yellow zone the probability of rejecting an accurate model is zero
- BExceptions in the yellow zone could plausibly come from either an accurate or an inaccurate model, so the framework balances Type 1 and Type 2 errorsCorrect
- CYellow zone results prove the model understates risk, so a higher multiplier is mandatory regardless of cause
- DYellow zone results only matter if exceptions are clustered
Explanation
Yellow zone counts are reasonably likely under both a correct model and a model that understates risk. Hence the framework allows supervisory judgment on the cause, e.g. a basic integrity issue or bad luck, rather than treating every case as proven failure. The claim of zero rejection error is false.
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