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PRMIA Exam 8010 Topic 1 Question 37 Discussion
Topic #: 1
Which of the following statements are correct:
1. 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
2. Cleansing, aggregating or ensuring data integrity is a task for the IT department, and is not a risk manager's responsibility
3. 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
4. The problem of lack of historical data can be addressed reasonably satisfactorily by using analytical approaches
Volatility clustering leads to levels of current volatility that can be significantly different from long run averages. When volatility is running high, institutions need to shed risk, and when it is running low, they can afford to increase returns by taking on more risk for a given amount of capital. An institution's response to changes in volatility can be either to adjust risk, or capital, or both. Accounting for volatility clustering helps institutions manage their risk and capital and therefore statements I and II are correct.
Regulatory requirements do not require volatility clustering to be taken into account (at least not yet). Therefore statement III is not correct, and neither is IV which is completely unrelated to volatility clustering.
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