Once the frequency and severity distributions for loss events have been determined, which of the following is an accurate description of the process to determine a full loss distribution for operational risk?
A.
A firm wide operational risk distribution is generated by adding together the frequency and severity distributions
B.
A firm wide operational risk distribution is generated using Monte Carlo simulations
C.
A firm wide operational risk distribution is set to be equal to the product of the frequency and severity distributions
D.
The frequency distribution alone forms the basis for the loss distribution for operational risk
Once the frequency distribution has been determined (for example, using the binomial, Poisson or the negative binomial distributions) and the severity distribution has also been determined (for example, using the lognormal, gamma or other functions), the loss distribution can be produced by a Monte Carlo simulation using successive drawings from each of these two distributions. It is assumed that the severity and frequency are independent of each other. The resulting distribution gives a distribution showing the losses for operational risk, from which there Op Risk VaR can be determined using the appropriate percentile.Therefore Choice 'b' is the correct answer.
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