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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A risk manager reviews an AI model that screens equity trades using alternative data (social media sentiment) supplied by a vendor. Which data quality issue most directly threatens the reliability of the model's output?

The main threat is unrepresentative, noisy or biased input data. Alternative data like social media sentiment can be unstructured, skewed toward certain users, and altered by vendors, so errors flow directly into model outputs. Garbage in leads to unreliable signals, making data governance and validation essential.

  1. AUnrepresentative, noisy or biased data that embeds errors and may change in coverage over timeCorrect
  2. BExcessively high capital requirements on trading assets
  3. CUse of central clearing for derivatives
  4. DOverly frequent rebalancing of the bank's HQLA

Explanation

AI models are only as reliable as their input data. Alternative data such as sentiment is often noisy, unstructured, biased toward certain users and subject to changing vendor methods. Biased or poor-quality inputs propagate into outputs. The other options are not data quality issues.

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