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PRMIA Exam 8010 Topic 1 Question 44 Discussion

Actual exam question for PRMIA's Operational Risk Manager (ORM) Exam exam
Question #: 44
Topic #: 1
[All Operational Risk Manager (ORM) Exam Questions]

Financial institutions need to take volatility clustering into account:

1. To avoid taking on an undesirable level of risk

2. To know the right level of capital they need to hold

3. To meet regulatory requirements

4. To account for mean reversion in returns

Show Suggested Answer Hide Answer
Suggested Answer: B

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.


by Maryann at Apr 09, 2024, 10:08 PM

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Edgar
8 days ago
Agreed, regulatory compliance is key. But I also think you need to understand the underlying dynamics, like mean reversion, to really get a handle on volatility clustering. I'm leaning towards D, just to show I've got a bit more finance knowledge up my sleeve.
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Paris
11 days ago
Haha, Netflix and chill, am I right? But seriously, this is an important topic. Volatility clustering can really mess up your risk models if you don't account for it properly. I'm going with C - gotta meet those regulatory requirements!
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Eura
11 days ago
Ooh, look at Mr. Fancy Pants over here talking about mean reversion! I just want to get this exam over with so I can go home and watch some Netflix. As long as I can pick the right answer, I don't really care about the details, you know?
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Osvaldo
12 days ago
Hmm, I'm not so sure. I think accounting for mean reversion is important too. Volatility clustering doesn't just affect risk and capital, it can also impact the overall return patterns. I might lean towards answer D - 1, 2 and 4.
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Peggie
15 days ago
Yeah, I agree. Volatility clustering is a key consideration, especially for risk management and capital adequacy. I'd go with answer C - 1, 2 and 3. Accounting for mean reversion in returns is interesting, but I'm not sure it's as directly relevant to volatility clustering.
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Luther
16 days ago
I think this question is really straightforward. Volatility clustering is all about the tendency for periods of high volatility to be followed by more high volatility, and vice versa for low volatility periods. Financial institutions need to be aware of this to set appropriate capital levels and meet regulatory requirements.
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