Discuss PRMIA 8010 Exam Topic 1 Question 28

Which of the following techniques is used to generate multivariate normal random numbers that are correlated?

ASimulation

BMarkov process

CCholesky decomposition of the correlation matrix

DPseudo random number generator

Suggested Answer: C

A PRNG (pseudo random number generators of the kind included in statistical packages and Excel) is used to generate random numbers that are not correlated with each other, ie they are random. A Markov process is a stochastic model that depends only upon its current state. Simulation underlies many financial calculations. None of these directly relate to generating correlated multivariate normal random numbers. That job is done utilizing a Cholesky decomposition of the correlation matrix.

Specifically, a Cholesky decomposition involves the factorization of the correlation matrix into a lower triangular matrix (a square matrix all of whose entries above the diagonal are zero) and its transpose. This can then be combined with random numbers to generate a set of correlated normal random numbers. This technique is used for calculating Monte Carlo VaR.

Get Premium 8010 Questions as Interactive Web-Based Practice Test or PDF Real Exam Format Detailed Explanations Instant Access Get Your Practice Test

12 comments · newest first

Karrie 11 months ago

I thought pseudo random generators could do this too?

Leandro 11 months ago

Markov process sounds interesting, but not for this.

Jeanice 12 months ago

Wait, isn't it just a fancy way to use simulation?

Sarina 12 months ago

Totally agree, C is the correct answer.

Geraldo 12 months ago

Cholesky decomposition is the way to go for correlated random numbers!

Celestina 1 year ago

I definitely recall that Cholesky decomposition is a technique used in this context, but I’m not 100% confident it’s the only correct answer.

Alecia 1 year ago

I’m a bit confused; I thought simulation could also generate correlated numbers, but maybe it’s not the specific technique they’re asking for here.

Glendora 1 year ago

I feel like we practiced a question similar to this, and I want to say that the correlation matrix plays a key role in the Cholesky method.

Lelia 1 year ago

I think I remember something about Cholesky decomposition being used for generating correlated random variables, but I'm not entirely sure.

Renea 1 year ago

I'm a bit confused about the differences between the Dataflow and Power Automate cloud flow options. I'll need to research those more to understand which one would be better for this scenario.

Louann 1 year ago

This is a good test of my understanding of project management principles. I'll need to apply my knowledge of budget management and scope changes to determine the right course of action here.

Chau 1 year ago

Hmm, I remember learning about MPLS LDP autoconfiguration, but I can't recall the specific IGPs it supports. I'll have to review my notes to jog my memory on this one.

PRMIA 8010 Exam - Topic 1 Question 28 Discussion