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FRM Part II · FRM Exam Part II · Case Study: Model Risk and Model Validation

Under supervisory guidance on model risk management (SR 11-7), which of the following best describes the three core elements of effective model validation?

The three core elements of validation under SR 11-7 are evaluation of conceptual soundness, ongoing monitoring including benchmarking, and outcomes analysis such as back-testing. Together they test whether the design is sound, whether the model keeps performing as intended, and whether results match actual outcomes.

  1. AEvaluation of conceptual soundness, ongoing monitoring including benchmarking, and outcomes analysis including back-testingCorrect
  2. BCode review, user acceptance testing, and annual external audit of the vendor
  3. CData cleansing, parameter calibration, and board approval of every model input
  4. DModel inventory maintenance, change management, and incident reporting

Explanation

SR 11-7 identifies evaluation of conceptual soundness, ongoing monitoring (process verification and benchmarking), and outcomes analysis (including back-testing) as the core validation elements. The other options describe supporting activities or governance tasks, not the three named elements.

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