# 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?
Correct Answer: C
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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?
Correct Answer: C
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Which of the following best describes the concept of marginal VaR of an asset in a portfolio:
Correct Answer: B
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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
Correct Answer: A
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Which of the following is not true about the ISDA master agreement (ISDA MA):
Correct Answer: B
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Concentration risk in a credit portfolio arises due to:
Correct Answer: C
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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.
Correct Answer: B
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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.
Correct Answer: A
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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?
Correct Answer: A
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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:
Correct Answer: C
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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.
Correct Answer: D
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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?
Correct Answer: D
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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.
Correct Answer: B
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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
Correct Answer: B
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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?
Correct Answer: B
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The sum of the stand alone economic capital of all the business units of a bank is:
Correct Answer: B
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Which of the following is not a possible early warning indicator in relation to the health of a counterparty?
Correct Answer: A
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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:
Correct Answer: B
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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
Correct Answer: A
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Which of the following correctly describes survivorship bias:
Correct Answer: D
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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.
Correct Answer: D
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The CDS rate on a defaultable bond is approximated by which of the following expressions:
Correct Answer: A
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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.
Correct Answer: D
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Which of the following statements are true:
I. Liquidity risks during time of crisis may be exacerbated by large collateral calls continuing over a period of time.
II. Stress tests are always separately modeled from VaR computations which cannot deal with stress scenarios of the kind considered in stress tests.
III. A maximum loss scenario considers the maximum possible loss given a 'plausibility constraint' that is based upon the joint probability of such a loss happening
Correct Answer: A
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The difference between true severity and the best approximation of the true severity is called:
Correct Answer: D
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If a borrower has a default probability of 12% over one year, what is the probability of default over a month?
Correct Answer: A
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