8007 by PRMIA Valid Free Exam Practice Test

Question 1

Which statement regarding the matrix below is true?

A. It is positive semi-definite B. It is not positive definite C. It is positive definite D. It is negative definite

Correct Answer: B

Question 2

Which of the following statements are true about Maximum Likelihood Estimation?
(i) MLE can be applied even if the error terms are not i.i.d. normal.
(ii) MLE involves integrating a likelihood function or a log-likelihood function.
(iii) MLE yields parameter estimates that are consistent.

A. (i), (ii), and (iii) B. (i) and (iii) C. (i) only D. (i) and (ii)

Correct Answer: B

Question 3

Which of the following statements is true?

A. The constant plays an important role in the mathematical description of continuous compounding. B. Discrete and continuous compounding produce the same results if the discount rate is positive. C. Continuous compounding is the better method because it results in higher present values compared to discrete compounding. D. Continuous compounding can be thought as making the compounding period infinitesimally small.

Correct Answer: D

Question 4

A 95% confidence interval for a parameter estimate can be interpreted as follows:

A. The probability that the estimated value of the parameter is outside this interval is 95%. B. The probability that the estimated value of the parameter is within this interval is 95%. C. The probability that the real value of the parameter is outside this interval is 95%. D. The probability that the real value of the parameter is within this interval is 95%.

Correct Answer: D

Question 5

In a binomial tree lattice, at each step the underlying price can move up by a factor of u = 1.1 or down by a factor of . The continuously compounded risk free interest rate over each time step is 1% and there are no dividends paid on the underlying. The risk neutral probability for an up move is:

A. 0.5286 B. 0.5290 C. 0.5288 D. 0.5292

Correct Answer: C

Question 6

Consider two securities X and Y with the following 5 annual returns:
X: +10%, +3%, -2%, +3%, +5%
Y: +7%, -2%, +3%, -5%, +10%
In this case the sample covariance between the two time series can be calculated as:

A. 0.32583 B. 0.00109 C. 0.40729 D. 0.00087

Correct Answer: B

Question 7

Exploring a regression model for values of the independent variable that have not been observed is most accurately described as...

A. Estimation B. Prediction C. Regression D. Hypothesis testing

Correct Answer: B

Question 8

A simple linear regression is based on 100 data points. The total sum of squares is 1.5 and the correlation between the dependent and explanatory variables is 0.5. What is the explained sum of squares?

A. 1.125 B. 0.375 C. 0.75 D. 0.3333

Correct Answer: B

Question 9

When calculating the implied volatility from an option price we use the bisection method and know initially that the volatility is somewhere between 1% and 100%. How many iterations do we need in order to determine the implied volatility with accuracy of 0.1%?

A. 5 B. 10 C. 25 D. 100

Correct Answer: B

Question 10

Consider the linear regression model for the returns of stock A and the returns of stock B. Stock A is 50% more volatile than stock B. Which of the following statements is TRUE?

A. Beta must be positive ( ) B. Alpha must be positive ( ) C. The stocks must be positively correlated ( ) D. Beta must be greater in absolute value than the correlation of the stocks ( )

Correct Answer: D

PRMIA Exam II: Mathematical Foundations of Risk Measurement - 2015 Edition - 8007 Exam Practice Test