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

A supervisor assesses how widespread AI adoption could change the transmission of a shock. Which of the following conclusions is most consistent with the view that AI can increase systemic vulnerability even while improving average efficiency?

The best conclusion is that faster, automated decision-making can speed up shock propagation and limit human intervention, even if average performance improves. Efficiency in normal conditions does not guarantee resilience in stress, so tail and systemic risks can rise despite better average outcomes.

  1. AFaster, more automated decisions can compress reaction times, so shocks may propagate more quickly and with less opportunity for human intervention, even if normal-time performance improvesCorrect
  2. BBecause AI improves average forecasting accuracy, tail risks are necessarily lower
  3. CBecause AI models are opaque, they cannot be correlated across firms
  4. DBecause AI reduces costs, concentration risk must fall

Explanation

Efficiency gains in normal times do not imply robustness in stress; speed, opacity and common models can amplify tail events. The other options draw unsupported conclusions: better average accuracy does not eliminate tail risk, opacity does not prevent correlation, and cost reduction does not reduce concentration.

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