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8005
Associate PRM Exam English Questions and Answers

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Viewing questions 21-30 out of questions

Questions # 21:

The standalone economic capital estimates for the three uncorrelated business units of a bank are $100, $200 and $150 respectively. What is the combined economic capital for the bank?

Options:

269

72500

450

Answer

Explanation

Since the business units are uncorrelated, we can get the combined EC as equal to the square root of the sum of the squares of the individual EC estimates. Therefore Choice 'a' is the correct answer. [=SQRT(100^2+200^2+150^2)]

Questions # 22:

Boards, including Audit and Risk Committees must:

I. Clearly articulate the corporate risk appetite to senior management

II. Thoroughly review compensation plans of potentially "highly compensated positions" for consistency with corporate risk appetite, competitive market conditions and fiduciary responsibility to shareholders

III. Have a single member formally given responsibility for understanding and reporting the effectiveness of the corporation's risk management infrastructure

IV. Be fully accountable to shareholders and work to the benefit of public good and financial stability

Options:

I and II only

I, II and IV only

I, II and III only

All of these are responsibilities of Board and Audit Committees

Answer

Questions # 23:

For a bank using the advanced measurement approach to measuring operational risk, which of the following brings the greatest 'model risk' to its estimates:

Options:

Choice of an incorrect distribution for loss event frequencies

Insufficient number of simulations when building the loss distribution

Choice of incorrect parameters for loss severity distributions

Aggregation risk, from selecting an incorrect value of estimated correlations between different operational risk estimates

Answer

Explanation

The greatest model risk when calculating operational risk capital comes from incorrect assumptions about correlations between different operational risks for which standalone risk calculations have been made. Generally, the correlation can be expected to be positive, and would therefore vary between 0 and 1. These two values determine the 'bounds' between which the total operational risk capital would lie, and these bounds are generally quite far apart. Therefore the total value of the operational risk capital is very sensitive to the value chosen for the correlation, and this is the source of the biggest model risk under the AMA.

Questions # 24:

The "normal" credit loss profile of Washington Mutual was increased by which of the following?

Options:

The general downturn in the economy of the US

By lowering its own credit underwriting standards

Acquisitions like Long Beach and Providian

Catastrophic losses in its own credit card division

Answer

Questions # 25:

A floating rate note pays daily overnight LIBOR. It matures in exactly one year. What is the duration of the note?

Options:

0.5 years

0.33 years

0 years

1 year

Answer

Explanation

Since the note pays daily LIBOR, there is no interest rate risk associated with this instrument. Note that interest rate risk for a fixed income instrument arises when the current interest rate changes to a rate different from that the instrument pays. In this case, the rate floats, and is reset daily, therefore there is no risk and the duration is 0. Choice 'c' is the correct answer.

Questions # 26:

Zheng Zhu wants to open a new PRMIA Chapter in Wuhan, China. He can do this if:

Options:

At least 100 members live within 50 miles

A local business sponsors the chapter

Approved by the Board of Directors

All of the above

Answer

Questions # 27:

A biased coin has a probability of getting heads equal to 0.3. If the coin is tossed 4 times, what is the probability of getting heads at least two times?

Options:

0.7367

0.3483

0.2646

None of these

Answer

Questions # 28:

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:

II and III

III and IV

I and II

All statements are true

Answer

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.

Questions # 29:

An error by a third party service provider results in a loss to a client that the bank has to make up. Such as loss would be categorized per Basel II operational risk categories as:

Options:

Execution delivery and process management

Outsourcing loss

Business disruption and process failure

Abnormal loss

Answer

Explanation

Choice 'a' is the correct answer. Refer to the detailed loss event type classification under Basel II (see Annex 9 of the accord). You should know the exact names of all loss event types, and examples of each.

Questions # 30:

The Altman credit risk score considers:

Options:

A historical database of the firms that have defaulted

A quadratic approximation of the credit risk based on underlying risk factors

A combination of accounting measures and market values

A historical database of the firms that have survived

Answer

Explanation

A computation of Altman's Z-score considers the following ratios:

- Working capital to total assets

- Retained earnings to total assets

- EBIT to total assets

- Market cap to debt

- Sales to total assets

Nearly all the numbers above are accounting measures derived straight from the balance sheet or the income statement. Market capitalization is a market driven number. Therefore Choice 'c' is the correct answer as the Altman credit risk score considers both accounting and market based measures.

Altman's score, though computationally straightforward and intuitively easy to understand, was introduced in the late sixties and has been very accurate in predicting corporate bankruptcies, which is why it continues to be used extensively.

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