Discuss PRMIA 8010 Exam Topic 1 Question 10

Which of the following statements are true:

1. The sum of unexpected losses for individual loans in a portfolio is equal to the total unexpected loss for the portfolio.

2. The sum of unexpected losses for individual loans in a portfolio is less than the total unexpected loss for the portfolio.

3. The sum of unexpected losses for individual loans in a portfolio is greater than the total unexpected loss for the portfolio.

4. The unexpected loss for the portfolio is driven by the unexpected losses of the individual loans in the portfolio and the default correlation between these loans.

A1 and 2

B1, 2 and 3

C3 and 4

D2 and 4

Suggested Answer: C

Unexpected losses (UEL) for individual loans in a portfolio will always sum to greater than the total unexpected loss for the portfolio (unless all the loans are correlated in such a way that they default together). This is akin to the 'diversification effect' in market risk, in other words, not all the obligors would default together. So the UEL for the portfolio will always be less than the sum of the UELs for individual loans. Therefore statement III is true. This 'diversification effect' will be affected by the default correlations between the obligors, in cases where the probability of various obligors defaulting together is low, the UEL for the portfolio would be much less than the UEL for the individual loans. Hence statement IV is true. I and II are false for the reasons explained above.

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12 comments · newest first

Jacqueline 11 months ago

Not sure about statement 3, feels off to me.

Kindra 11 months ago

Totally agree with 4, correlation matters!

Elliot 12 months ago

Surprised that people think the sums can be equal!

Viola 12 months ago

I think statement 2 is misleading.

Aron 12 months ago

Statement 4 is definitely true!

Tiera 1 year ago

I feel like statement 1 can't be true because of the way portfolio risk works, but I need to double-check my notes on that.

Jina 1 year ago

I practiced a similar question, and I think statement 2 might be correct, but I'm confused about how correlation plays into it.

Bette 1 year ago

I'm not entirely sure, but I think the total unexpected loss for the portfolio is usually greater than the sum of individual losses due to diversification effects.

Sarina 1 year ago

I remember something about how individual loan losses can be affected by correlation, so maybe statement 4 is true?

Claudia 1 year ago

Okay, I've got this. The key here is to ensure the UAT results are documented securely, so I would recommend option C - enabling history in the shared spreadsheet. That way, we can see who made changes and when, which should meet the security requirements.

Stanford 1 year ago

Okay, I've got this. The outputs are Project document updates, Cost performance baseline, and Project funding requirements. I'm confident those are the correct answers.

Sue 1 year ago

Hmm, the diagram shows some kind of multi-step publishing process. I'm thinking Launches might be the most straightforward solution here.

PRMIA 8010 Exam - Topic 1 Question 10 Discussion