PRMIA 8010 Exam - Topic 1 Question 50 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 50
Topic #: 1

There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds over a one year horizon are 0.03 and 0.08 respectively. If the default correlation is zero, what is the one year expected loss on this portfolio?

A$11m

B$5.26m

C$5.5m

D$1.38m

Show Suggested Answer

Suggested Answer: C

For EVT, we use the block maxima or the peaks-over-threshold methods. These provide us the data points that can be fitted to a GEV distribution.

Least squares and maximum likelihood are methods that are used for curve fitting, and they have a variety of applications across risk management.

by Carin at Jun 20, 2024, 01:14 PM

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Josue

6 months ago

I got $5.5m after running the numbers.

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Karon

6 months ago

Wait, are we sure about the correlation being zero? Seems odd.

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Lettie

6 months ago

Definitely not $11m, that's way too high!

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Shala

7 months ago

I think it's closer to $5.26m.

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Elza

7 months ago

The expected loss is calculated using the formula for expected loss = probability of default × exposure.

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Marisha

7 months ago

I’m leaning towards option B, but I’m not completely confident. I should probably double-check my calculations for each bond's expected loss.

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Hubert

7 months ago

I feel like I might have seen a question like this where we had to consider the correlation, but since it's zero here, it should simplify things a bit.

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Lino

7 months ago

I think the expected loss is the sum of the individual expected losses from each bond, but I can't recall the exact formula we used in class.

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Reiko

8 months ago

I remember calculating expected loss in a similar question, but I'm not sure if I should just multiply the probabilities by the market values directly.

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Carmela

8 months ago

This looks straightforward enough. I'll start by calculating the expected loss for each bond, then add them together. Shouldn't be too tricky.

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Paz

8 months ago

I think I've got this. If the default correlation is zero, then the expected loss is just the sum of the expected losses on each individual bond, right? So we can calculate that and add them up.

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Eliseo

8 months ago

Hmm, I'm a bit confused. How do we calculate the expected loss when the default correlation is zero? I'll need to review the formula for that.

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Melissa

8 months ago

Okay, let's think this through step-by-step. We have two bonds with different default probabilities, and we need to find the expected loss on the portfolio.

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Pete

8 months ago

I'm a bit confused by the wording of this question. I'll need to review my notes on provider integration to make sure I'm interpreting the options correctly.

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Tamekia

8 months ago

Ah, I've seen questions like this before. Probability of failure is usually expressed in terms of frequency or likelihood, not just as abstract details. I'm pretty confident B is the right answer here.

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