PRMIA 8010 Exam - Topic 5 Question 78 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 78
Topic #: 5

[All 8010 Questions]

Concentration risk in a credit portfolio arises due to:

AA high degree of correlation between the default probabilities of the credit securities in the portfolio

BA low degree of correlation between the default probabilities of the credit securities in the portfolio

CIssuers of the securities in the portfolio being located in the same country

DIndependence of individual default losses for the assets in the portfolio

Show Suggested Answer

Suggested Answer: C

Concentration risk in a credit portfolio arises due to a high degree of correlation between the default probabilities of the issuers of securities in the portfolio. For example, the fortunes of the issuers in the same industry may be highly correlated, and an investor exposed to multiple such borrowers may face 'concentration risk'.

A low degree of correlation, or independence of individual defaults in the portfolio actually reduces or even eliminates concentration risk.

The fact that issuers are from the same country may not necessarily give rise to concentration risk - for example, a bank with all US based borrowers in different industries or with different retail exposure types may not face practically any concentration risk. What really matters is the default correlations between the borrowers, for example a lender exposed to cement producers across the globe may face a high degree of concentration risk.

by Miesha at Nov 23, 2025, 10:01 PM

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Caitlin

7 hours ago

But A is the strongest choice. Correlation is key in credit risk.

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Jestine

6 days ago

I feel like D is also a contender. Independence reduces risk.

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Malcolm

11 days ago

A makes sense. Concentration risk is all about correlation.

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Vincent

16 days ago

I’m leaning towards C. Same country can mean similar risks.

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Claribel

21 days ago

Definitely A! If defaults are correlated, it's a big problem.

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Alton

26 days ago

D seems like the opposite of concentration risk, right?

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Carlene

1 month ago

Totally agree with A, concentration risk is no joke!

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Providencia

1 month ago

Wait, are we really saying low correlation is a risk? That seems off.

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Marylyn

1 month ago

I think C could also play a role, though.

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Carissa

2 months ago

A) A high degree of correlation between the default probabilities of the credit securities in the portfolio. Bingo! Correlation is the key to understanding concentration risk.

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Shalon

2 months ago

D) Independence of individual default losses for the assets in the portfolio. Wait, isn't that the opposite of concentration risk?

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Cassi

2 months ago

This question is making me feel a bit "credit-ed" out. Time for a coffee break!

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Ronnie

3 months ago

C) Issuers of the securities in the portfolio being located in the same country. Diversifying across countries can help reduce concentration risk.

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Royce

3 months ago

A) A high degree of correlation between the default probabilities of the credit securities in the portfolio. This makes sense, as concentration risk arises when the assets in the portfolio are highly correlated.

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Santos

3 months ago

I vaguely recall that independence of defaults would actually mitigate concentration risk, so D seems unlikely. I’m leaning towards A as the best choice.

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Sharita

3 months ago

I practiced a similar question where the focus was on geographic concentration. I think C could be a factor, but it seems more about correlation.

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Madelyn

3 months ago

I’m not entirely sure, but I feel like low correlation would actually reduce concentration risk, which makes me think B is wrong.

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Devora

3 months ago

I remember discussing concentration risk, and I think it has to do with high correlation between defaults. So, I might lean towards A.

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Lashonda

4 months ago

I'm pretty confident the answer is A. Concentration risk is all about correlated exposures, so high default correlation is the clear culprit here. The other options just don't match up with the definition of concentration risk.

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Fallon

4 months ago

I'm a little confused on this one. Is it saying that low correlation causes concentration risk? That doesn't seem right to me. I'll have to review my notes again before deciding.

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Barbra

4 months ago

Okay, I've got this. The key is that concentration risk is about lack of diversification, so it has to be A - high correlation between defaults. The other options don't really fit the concept.

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Osvaldo

4 months ago

I think it's A. High correlation leads to higher risk.

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Francene

4 months ago

Definitely A, high correlation is the issue.

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Ryan

5 months ago

Hmm, I'm a bit unsure about this one. I'll have to think it through carefully. Could it also be C, with issuers all being in the same country?

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Margart

5 months ago

I think the answer is A - a high degree of correlation between the default probabilities. That makes sense since concentration risk is about the portfolio being overly exposed to a common risk factor.

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