PRMIA 8008 Dumps - PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition PDF Sample Questions

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Exam Code:
8008
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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
362 Questions
Last Update Date : 24 February, 2024
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Sample Questions

Realexamdumps Providing most updated PRM Certification Question Answers. Here are a few sample questions:

PRMIA 8008 Sample Question 1

For a corporate bond, which of the following statements is true:

I. The credit spread is equal to the default rate times the recovery rate

II. The spread widens when the ratings of the corporate experience an upgrade

III. Both recovery rates and probabilities of default are related to the business cycle and move in opposite directions to each other

IV. Corporate bond spreads are affected by both the risk of default and the liquidity of the particular issue


Options:

A. I, II and IV
B. III and IV
C. III only
D. IV only

Answer: B Explanation: Explanation: The credit spread is equal to the default rate times the loss given default, or stated another way, default rate times (1 - recovery rate). It is not equal to the default rate times the recovery rate. Therefore statement I is not correct.When ratings are upgraded by rating agencies, the spread contracts and not widen. Therefore statement II is not correct.Both recovery rates and probabilities of default are related to the business cycle, and they move in opposite directions. Economic recessions witness an increase in the default rate and a decrease in the recovery rate, and economic expansions result in a decrease in the default rate and an increase in the recovery rates when default does happen. Therefore statement III is correct.Bond spreads incorporate both the risk of default, but also considerations of liquidity in the case of corporate bonds. Hence statement IV is correct.

PRMIA 8008 Sample Question 2

As opposed to traditional accounting based measures, risk adjusted performance measures use which of the following approaches to measure performance:


Options:

A. adjust both return and the capital employed to account for the risk undertaken
B. adjust capital employed to reflect the risk undertaken
C. adjust returns based on the level of risk undertaken to earn that return
D. Any or all of the above

Answer: D Explanation: Explanation: Performance measurement at a very basic level involves comparing the return earned to the capital invested to earn that return. Risk adjusted performance measures (RAPMs) come in various varieties - and the key difference between RAPMs and traditional measures such as return on equity, return on assets etc is that RAPMs account for the risk undertaken. They may do so by either adjusting the return, or the capital, or both. They are classified as RAROCs (risk adjusted return on capital), RORACs (return on risk adjusted capital) and RARORACs (risk adjusted return on risk adjusted capital).

PRMIA 8008 Sample Question 3

Which of the following are true:

I. Monte Carlo estimates of VaR can be expected to be identical or very close to those obtained using analytical methods if both are based on the same parameters.

II. Non-normality of returns does not pose a problem if we use Monte Carlo simulations based upon parameters and a distribution assumed to be normal.

III. Historical VaR estimates do not require any distribution assumptions.

IV. Historical simulations by definition limit VaR estimation only to the range of possibilities that have already occurred.


Options:

A. III and IV
B. I, III and IV
C. I, II and III
D. All of the above

Answer: B Explanation: Explanation: Statement I is true. If a Monte Carlo simulation is based upon the same parameters as used for analytical VaR, and enough number of simulations are carried out, we would get the same results as with analytical VaR.Statement II is false. We cannot use Monte Carlo simulations using parameters based upon a normal assumption when the underlying distribution is not normal. For example, if a return stream is based upon say a uniform distribution, we cannot use a simulation based upon drawings from a normal distribution even though we use the same mean and standard deviation.Statement III is true. This is the advantage of historical simulations - no assumptions are necessary. (Historical simulations however often suffer from the great disadvantage of the paucity of data that would cover all possibilities.)Statement IV is true. The results of historical simulations are limited to the data they are based upon.

PRMIA 8008 Sample Question 4

Which of the following statements is true:

I. When averaging quantiles of two Pareto distributions, the quantiles of the averaged models are equal to the geometric average of the quantiles of the original models based upon the number of data items in each original model.

II. When modeling severity distributions, we can only use distributions which have fewer parameters than the number of datapoints we are modeling from.

III. If an internal loss data based model covers the same risks as a scenario based model, they can can be combined using the weighted average of their parameters.

IV If an internal loss model and a scenario based model address different risks, the models can be combined by taking their sums.


Options:

A. II and III
B. III and IV
C. I and II
D. All statements are true

Answer: D Explanation: Explanation: Statement I is true, the quantiles of the averaged models are equal to the geometric average of the quantiles of the original models.Statement II is correct, the number of data points from which model parameters are estimated must be greater than the number of parameters. So if a distribution, say Poisson, has one parameter, we need at least two data points to estimate the parameter. Other complex distributions may have multiple parameters for shape, scale and other things, and the minimum number of observations required will be greater than the number of parameters.Statement III is true, if the ILD data and scenarios cover the same risk, they are essentially different perspectives on the same risk, and therefore should be combined as weighted averages.But if they cover completely different risks, the models will need to be added together, not averaged - which is why Statement IV is true.

PRMIA 8008 Sample Question 5

Which of the following are considered asset based credit enhancements?

I. Collateral

II. Credit default swaps

III. Close out netting arrangements

IV. Cash reserves


Options:

A. II and IV
B. I, II and IV
C. I and IV
D. I and III

Answer: D Explanation: Explanation: Credit enhancements come in two varieties: counterparty based, where the exercise of the credit enhancement requires a third party to pay, and this includes guarantees and CDS contracts. Asset based credit enhancements are based upon a physical asset in possession, and these include collateral and balances owed on other trades or transactions, and availed through close out netting arrangements.Of the listed choices, I and III are asset based credit enhancements, and II is third party based. Cash reserves are not credit enhancements (unless held as collateral).

PRMIA 8008 Sample Question 6

Which of the following statements is true:

I. Recovery rate assumptions can be easily made fairly accurately given past data available from credit rating agencies.

II. Recovery rate assumptions are difficult to make given the effect of the business cycle, nature of the industry and multiple other factors difficult to model.

III. The standard deviation of observed recovery rates is generally very high, making any estimate likely to differ significantly from realized recovery rates.

IV. Estimation errors for recovery rates are not a concern as they are not directionally biased and will cancel each other out over time.


Options:

A. II and IV
B. I, II and IV
C. III and IV
D. II and III

Answer: D Explanation: Explanation: Recovery rates vary a great deal from year to year, and are difficult to predict. Therefore statement III is true. Similarly, any attempt to predict these is hamstrung by a high standard error, which can be as high as the historical mean itself. The error does not cancel itself out due to the effect of the business cycle making the error directionally biased. Thus statement IV is false.Statement II is true as these are all factors that make forecasting recovery rates for any credit risk model rather difficult. Statement I is false because recovery rates are difficult to predict and assumptions are not easy to make.

PRMIA 8008 Sample Question 7

Which of the following methods cannot be used to calculate Liquidity at Risk?


Options:

A. Monte Carlo simulation
B. Analytical or parametric approaches
C. Historical simulation
D. Scenario analysis

Answer: B Explanation: Explanation: Analytical or parametric approaches are not useful at all for liquidity at risk calculations because there are no neat distributions available to parameterize the large number of factors that affect the calculations of liquidity inflows and outflows. Historical simulations, Monte Carlo and scenario analysis (which can complement historical scenarios) are all valid choicet

PRMIA 8008 Sample Question 8

If the annual variance for a portfolio is 0.0256, what is the daily volatility assuming there are 250 days in a year.


Options:

A. 0.0101
B. 0.4048
C. 0.0006
D. 0.0016

Answer: A Explanation: Explanation: If annual variance is 0.0256, then annual volatility (ie standard deviation) is √0.0256. Therefore the daily volatility will be √0.0256/√250 = 1.01%. The other choices are not correct.

PRMIA 8008 Sample Question 9

All else remaining the same, an increase in the joint probability of default between two obligors causes the default correlation between the two to:


Options:

A. Increase
B. Decrease
C. Stay the same
D. Cannot be determined from the given information

Answer: A Explanation: Explanation: The default correlation between two obligors goes up if the joint probability of default between them increases. This is intuitive. Also consider the formula for the default correlation between two obligorsDefault correlation = [P(1,2) - P1 * P2] / √P1*(1-P1)*P2*(1-P2); where P(1,2) is the joint probability of default between the two and P1 and P2 are their individual probabilities of default. Obviously, an increase in P(1,2) will cause the default correlation to increase.

PRMIA 8008 Sample Question 10

There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon. If the probability of the two bonds defaulting simultaneously is 1.4%, what is the default correlation between the two?


Options:

A. 0%
B. 100%
C. 40%
D. 25%

Answer: D Explanation: Explanation: Probability of the joint default of both A and B =We know all the numbers except default correlation, and we can solve for it.Default Correlation*SQRT(0.03*(1 - 0.03)*0.08*(1 - 0.08)) + 0.03*0.08 = 0.014.Solving, we get default correlation = 25%

PRMIA 8008 Sample Question 11

A risk analyst peforming PCA wishes to explain 80% of the variance. The first orthogonal factor has a volatility of 100, and the second 40, and the third 30. Assume there are no other factors. Which of the factors will be included in the final analysis?


Options:

A. First, Second and Third
B. First and Second
C. First
D. Insufficient information to answer the question

Answer: C Explanation: Explanation: The total variance of the system is 100^2 + 40^2 + 30^2 = 12500 (as variance = volatility squared). The first factor alone has a variance of 10,000, or 80%. Therefore only the first factor will be included in the final analysis, and the rest will be ignored.Interestingly, this example highlights one of the limitations of PCA. Obviously, the second and third factors are material when considering volatility, though the effect of squaring them to get the variance makes them appear less important than they are.

PRMIA 8008 Sample Question 12

Which of the following are valid approaches for extreme value analysis given a dataset:

I. The Block Maxima approach

II. Least squares approach

III. Maximum likelihood approach

IV. Peak-over-thresholds approach


Options:

A. II and III
B. I, III and IV
C. I and IV
D. All of the above

Answer: C Explanation: Explanation: For EVT, we use the block maxima or the peaks-over-threshold methods. These provide us the data points that can be fitted to a GEV distribution.Least squares and maximum likelihood are methods that are used for curve fitting, and they have a variety of applications across risk management.


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