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8005
Associate PRM Exam English Questions and Answers

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Viewing questions 101-110 out of questions

Questions # 101:

What is the probability of tossing a coin and getting exactly 2 heads out of 5 throws?

Options:

8/15

9/23

10/32

None of these

Answer

Questions # 102:

When supervising others, a PRMIA member must comply with

Options:

PRMIA Standards

the standards of the organization where the work is being performed

his / her established personal standards of work approved in previous work situations

local regulatory authority standards which may be less onerous than PRMIA standards

Answer

Questions # 103:

A financial institution is considering shedding a business unit to reduce its economic capital requirements. Which of the following is an appropriate measure of the resulting reduction in capital requirements?

Options:

Incremental capital for the business unit in consideration

Proportionate capital for the business unit in consideration

Percentage of total gross income contributed by the business unit in question

Marginal capital for the business unit in consideration

Answer

Explanation

Incremental capital (or incremental VaR, depending upon the context), is a measure of the change in the capital (or VaR) requirements if a certain change is made to a portfolio. It uses the 'before' and 'after' approach, ie find out what the capital requirement or VaR will be without the change, and what it will be after the change. The difference is the incremental capital or incremental VaR. It helps measure the change in risk as a result of a particular action, eg a change in a position.

Marginal capital or VaR on the other hand is a method to break down the capital requirement or the VaR so that it can be assigned to individual positions within the portfolio. The total of marginal capital or marginal VaR for all the positions in a portfolio adds up to the total capital requirements or total VaR. Note that marginal VaR is also called component VaR.

Therefore incremental capital is the correct answer to this question. The other choices are incorrect. In the exam, the question may be phrased differently, so try to keep in mind the different betweenincremental and marginal capital, which can be a bit confusing given what these terms mean in plain English.

Questions # 104:

Barings Bank and Orange County have many similarities. Which of the following is NOT a similarity?

Options:

Both relied on a star manger, supposedly in a low risk business.

Both losses grew over time, but were not discovered by management until too late.

Both traded in illiquid and obscure markets that were easy to manipulate.

Both losses were eventually exposed by massive margin calls.

Answer

Questions # 105:

Which of the following is closest to the description of a 'risk functional'?

Options:

A risk functional is the distribution that models the severity of a risk

A risk functional is a model distribution that is an approximation of the true loss distribution of a risk

Risk functional refers to the Kolmogorov-Smirnov distance

A risk functional assigns a penalty value for the difference between a model distribution and a risk's severity distribution

Answer

Explanation

For operational risk modeling, both frequency and severity distributions need to be modeled. Modeling severity involves finding an analytical distribution, such as log-normal or other that approximates the distribution best represented by known data - whether from the internal loss database, the external loss database or scenario data. A 'risk functional' is a measure of the deviation of the model distribution from the risk's actual severity distribution. It assigns a penalty value for the deviation, using a statistical measure, such as the KS distance (Kolmogorov-Smirnov distance).

The problem of finding the right distribution then becomes the problem of optimizing the risk functional. For example, if F is the model distribution, and G is the actual, or empirical severity distribution, and we are using the KS test, then the Risk Functional R is defined as follows:

105 A diagram of a function Description automatically generated with medium confidence

Note that supx stands for 'supremum', which is a more technical way of saying 'maximum'. In other words, we are calculating the maximum absolute KS distance between the two distributions. (Note that the KS distance is the max of the distance between identical percentiles of the two distributions using the CDFs of the two.)

Once the risk functional is identified, we can minimize it to determine the best fitting distribution for severity.

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