Free Access to PRMIA.8010.v2022-03-04.q88 with Valid Practice Test (Page 6)

Question 21

A corporate bond has a cumulative probability of default equal to 20% in the first year, and 45% in the second year. What is the monthly marginal probability of default for the bond in the second year, conditional on there beingno default in the first year?

A.3.07%
B.2.60%
C.15.00%
D.31.25%

Question 22

Which of the following statements are correct:
I. A training set is a set of data used to create a model, while a control set is a set of data is used to prove that the model actually works II. Cleansing, aggregating or ensuring data integrity is a task for the IT department, and is not a risk manager's responsibility III. Lack of information on the quality of underlying securities and assets was a major cause of the collapse in the CDO markets during the credit crisis that started in 2007 IV. The problem of lack of historical data can be addressed reasonably satisfactorily by using analytical approaches

A.II and IV
B.I, III and IV
C.I and III
D.All of the above

Correct Answer: C

Explanation
Statement I is correct. Data is often divided into two sets - a 'training set' that is used to create and fine-tune the model while the 'control set' is used to prove that the model works on sample data. Back testing is then perfomed using actual data that becomes available over time, or may already be available as historical data.
Statement II is incorrect. A risk manager often spends a great deal of time in managing data,and ensuring that the data being used is accurate enough for the purpose it is being used for. A risk manager can expect to spend a good part of his or her team's time in cleansing data. While he or she can try to get the IT processes and systems to produce correct data in the first place so it requires minimal subsequent cleansing or validation, this task is likely to remain a key part of a risk manager's role for quite some time in the future given the challenges nearly all organizations face in managingrisk data.
Statement III is correct. There was not enough granular data available on the underlying components of some of the derivative debt securities whose markets dried up during the crisis that began in 2007. This was because investors became increasingly unsure of what the value of these securities, such as CDOs was, leading to market seizure and firesale prices.
Statement IV is not correct. There is no easy solution to the lack of enough historical data, which is used to create as well as test models, and construct stress scenarios. Analytical approaches are not a good enough substitute for real market data. During the recent crisis, many instruments had rather short histories and there was not enough data available, and risk managers and portfolio managers relied upon analytical approaches to value and price them. Many of the assumptions that underpinned these approaches were untested in the real world and turned out to be incorrect.
Therefore Choice 'c' is the correct answer and the rest are incorrect.

Question 23

Which of the following is not a credit event under ISDA definitions?

A.Restructuring
B.Obligation accelerations
C.Rating downgrade
D.Failure to pay

Question 24

The frequency distribution for operational risk loss events can be modeled by which of the following distributions:
I. The binomial distribution
II. The Poisson distribution
III. The negative binomial distribution
IV. The omega distribution

A.I, II and III
B.I and III
C.I, III and IV
D.I, II, III and IV

Question 25

Which of the following belong to the family of generalized extreme value distributions:
I. Frechet
II. Gumbel
III. Weibull
IV. Exponential

A.IV
B.I, II and III
C.II and III
D.All of the above

Question 21

Question 22

Question 23

Question 24

Question 25

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