# PRMIA PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition - 8008 Exam Practice Test

There are two bonds in a portfolio, each with a market value of \$50m. The probability of default of the two bonds over a one year horizon are 0.03 and 0.08 respectively. If the default correlation is zero, what is the one year expected loss on this portfolio?
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The probability of default of a security during the first year after issuance is 3%, that during the second and third years is 4%, and during the fourth year is 5%. What is the probability that it would not have defaulted at the end of four years from now?
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Which of the following best describes the concept of marginal VaR of an asset in a portfolio:
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Which of the following statements is correct in relation to liquidity risk management?
I. Pricing for products that do not impact the balance sheet need not reflect the cost of maintaining liquidity II. Time horizons for liquidity risk management are impacted by both regulatory requirements and the speed at which new sources of liquidity can be tapped III. Collateral management is an important aspect of liquidity risk management IV. The maturity period of various instruments in the capital structure has a significant impact on liquidity needs
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Which of the following is not true about the ISDA master agreement (ISDA MA):
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Concentration risk in a credit portfolio arises due to:
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Which of the following are valid approaches to leveraging external loss data for modeling operational risks:
I. Both internal and external losses can be fitted with distributions, and a weighted average approach using these distributions is relied upon for capital calculations.
II. External loss data is used to inform scenario modeling.
III. External loss data is combined with internal loss data points, and distributions fitted to the combined data set.
IV. External loss data is used to replace internal loss data points to create a higher quality data set to fit distributions.
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Which of the following statements are true:
I. Heavy tailed parametric distributions are a good choice for severity modeling in operational risk.
II. Heavy tailed body-tail distributions are a good choice for severity modeling in operational risk.
III. Log-likelihood is a means to estimate parameters for a distribution.
IV. Body-tail distributions allow modeling small losses differently from large ones.
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If the cumulative default probabilities of default for years 1 and 2 for a portfolio of credit risky assets is 5% and 15% respectively, what is the marginal probability of default in year 2 alone?
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Loss from a lawsuit from an employee due to physical harm caused while at work is categorized per Basel II as:
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A portfolio has two loans, A and B, each worth \$1m. The probability of default of loan A is 10% and that of loan B is 15%. The probability of both loans defaulting together is 1%. Calculate the expected loss on the portfolio.
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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?
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Which of the following statements are true:
I. Credit VaR often assumes a one year time horizon, as opposed to a shorter time horizon for market risk as credit activities generally span a longer time period.
II. Credit losses in the banking book should be assessed on the basis of mark-to-market mode as opposed to the default-only mode.
III. The confidence level used in the calculation of credit capital is high when the objective is to maintain a high credit rating for the institution.
IV. Credit capital calculations for securities with liquid markets and held for proprietary positions should be based on marking positions to market.
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Ex-ante VaR estimates may differ from realized P&L due to:
I. the effect of intra day trading
II. timing differences in the accounting systems
III. incorrect estimation of VaR parameters
IV. security returns exhibiting mean reversion
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The 99% 10-day VaR for a bank is \$200mm. The average VaR for the past 60 days is \$250mm, and the bank specific regulatory multiplier is 3. What is the bank's basic VaR based market risk capital charge?
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The sum of the stand alone economic capital of all the business units of a bank is:
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Which of the following is not a possible early warning indicator in relation to the health of a counterparty?
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When doing stress tests based on historical scenarios, if no appropriate historical scenarios exist for a security, it is most INAPPROPRIATE to:
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Which of the following assumptions underlie the 'square root of time' rule used for computing VaR estimates over different time horizons?
I. the portfolio is static from day to day
II. asset returns are independent and identically distributed (i.i.d.)
III. volatility is constant over time
IV. no serial correlation in the forward projection of volatility
V. negative serial correlations exist in the time series of returns
VI. returns data display volatility clustering
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Which of the following correctly describes survivorship bias:
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A stock's volatility under EWMA is estimated at 3.5% on a day its price is \$10. The next day, the price moves to \$11. What is the EWMA estimate of the volatility the next day? Assume the persistence parameter = 0.93.
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The CDS rate on a defaultable bond is approximated by which of the following expressions:
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For a security with a daily standard deviation of 2%, calculate the 10-day VaR at the 95% confidence level.
Assume expected daily returns to be nil.