PRMIA 8010 Exam - Topic 1 Question 33 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 33
Topic #: 1

There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon. If the probability of the two bonds defaulting simultaneously is 1.4%, what is the default correlation between the two?

A0%

B100%

C40%

D25%

Show Suggested Answer

Suggested Answer: D

The change in the price of a security that follows a Weiner process is determined by its standard deviation and expected return. To get the price itself, we need to add this change in price to the current price. Therefore the future price in a Weiner process is determined by all three of current price, expected return and standard deviation.

by Freeman at Aug 10, 2023, 02:14 AM

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Catalina

6 months ago

40% correlation sounds way too high for these numbers!

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Burma

6 months ago

I'm leaning towards option D, seems reasonable.

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Luis

7 months ago

Surprised the simultaneous default is only 1.4%!

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Marg

7 months ago

I think the correlation is definitely not 100%.

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Armanda

7 months ago

The default probabilities are 0.03 and 0.08.

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Renea

7 months ago

I vaguely recall that if the default probabilities are independent, the correlation would be 0%. So maybe option A could be the answer, but I'm not completely confident.

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Noe

7 months ago

I feel like the correlation should be low since the individual default probabilities are relatively low, but the simultaneous default probability is throwing me off a bit.

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Dulce

8 months ago

This question seems similar to one we practiced where we had to find the correlation based on joint probabilities. I think I might lean towards option D, but I need to double-check my calculations.

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Dorcas

8 months ago

I remember we discussed default correlation in class, but I'm not entirely sure how to calculate it from the probabilities given.

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Mari

8 months ago

Okay, let's see. Coordinating related projects, delivering business products, delivering outcomes and benefits, and aligning to strategic objectives - those all sound like typical programme goals to me. I'll have to really analyze these to figure out which one doesn't fit.

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Kristeen

8 months ago

Hmm, this seems like a tricky one. I'll need to carefully review the DataRaptor Load settings and the JSON data being sent from the OmniScript to identify any mismatches or issues.

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Floyd

8 months ago

I'm a bit confused on this one. I know a weighting system is used to evaluate proposals, but I'm not sure if that falls under Selecting sellers or another area. I'll have to review my notes to be sure.

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Jerilyn

1 year ago

Ah, the classic 'default correlation' question. I bet the answer is going to be a bit counterintuitive.

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Candida

1 year ago

Wait, what's the probability of two bonds defaulting simultaneously? That seems like a key piece of information here.

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Beckie

11 months ago

C) 40%

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Tawna

11 months ago

B) 100%

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Shayne

11 months ago

C) 40%

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Jerrod

11 months ago

A) 0%

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Roxane

11 months ago

B) 100%

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Caprice

12 months ago

A) 0%

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Dominga

1 year ago

Alright, time to put on my thinking cap. This might require a bit of creative problem-solving.

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Ashleigh

1 year ago

C) 40%

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Celestina

1 year ago

B) 100%

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Mona

1 year ago

A) 0%

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Sherrell

1 year ago

I feel like I've seen a question like this before. Time to put my finance knowledge to the test!

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Hildegarde

1 year ago

Hmm, the default probabilities and the joint default probability are given, so I should be able to work this out. Let me think it through step-by-step.

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