1.Bringing in a competent third party who is not responsible for model development to test estimates and assumptions used to create a model is known as:
　　A. business use testing.
　　B. solvency assessment.
　　C. effective challenge.
　　D. granularity.
　　2.A risk manager has calculated the surplus at risk for the company defined benefit pension scheme. She then sets limits all the way through the investment process including individual security selection. What is the methodology that was used by the risk manager?
　　A. Risk budgeting.
　　B. Asset allocation.
　　C. Dynamic triggers.
　　D. Downstreaming.
　　3.With respect to inefficient behaviors that can lead to suboptimal loan recovery rates, the condition known as “lazy banking” can lead to:
　　A. lower recovery rates, and it is the result of senior debtholders’ control.
　　B. higher recovery rates, and it is the result of senior debtholders’ control.
　　C. lower recovery rates, and it is the result of subordinate debtholders’ control.
　　D. higher recovery rates, and it is the result of subordinate debtholders’ control.
　　Answer:
　　1.C
　　One of the main ways a firm seeks to manage model risk is effective challenge. Effective challenge involves bringing in a competent third party to test estimates and assumptions used in creating a model.
　　2.D
　　The methodology used was downstreaming, which is part of the overall risk budgeting process. Downstreaming is intended to assign risk limits in a way that is consistent with the overall risk tolerance of the firm.
　　3.A
　　“Lazy banking” is the result of the senior debtholders having control and rights which lead to a low priority being placed on subordinate debtholders’ interests, and increases the probability of default.