PRMIA 8010 Exam - Topic 2 Question 63 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 63
Topic #: 2

[All 8010 Questions]

If the odds of default are 1:5, what is the probability of default?

A16.67%

B20.00%

C12.00%

D50.00%

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 Carey at Nov 13, 2024, 01:39 AM

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Socorro

4 months ago

I thought it was 12%... this is confusing!

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Idella

5 months ago

Yup, B is the right answer!

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Laticia

5 months ago

Wait, are we sure it's not 16.67%?

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Venita

5 months ago

Definitely going with B, 20% is correct!

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Ramonita

5 months ago

The probability of default is 20% based on 1:5 odds.

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Charlene

5 months ago

I’m leaning towards 16.67% too, but I just want to double-check my calculations before I commit to that answer.

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Tamera

6 months ago

I’m not entirely sure, but I feel like I might be mixing up odds and probability. Is it possible that the answer could be 20%?

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Donte

6 months ago

I remember practicing a similar question where we had to convert odds to probability. I think the formula is something like odds / (odds + 1).

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Wilda

6 months ago

I think the odds of 1:5 means there’s one default for every five non-defaults, so maybe it’s around 16.67%?

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Rodrigo

6 months ago

I think the key here is to remember that odds are not the same as probability. To convert the odds of 1:5 to a probability, I need to divide the first number by the sum of the two numbers, which gives me 1/6 or 16.67%. The answer is A.

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Wilburn

6 months ago

Wait, I'm confused. If the odds are 1:5, doesn't that mean the probability of default is 20%? I'm not sure I'm understanding this correctly.

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Tamesha

6 months ago

Okay, I've got this. If the odds of default are 1:5, that means the probability of default is 1 out of 6, or 16.67%. The answer is A.

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Lottie

6 months ago

Hmm, I'm a bit unsure about this one. The odds of default are given as 1:5, but I'm not sure how to use that to calculate the probability. I'll need to review my probability formulas.

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Hortencia

6 months ago

This looks like a straightforward probability question. I'll need to think through the odds of default and how to convert that to a probability.

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Stephania

11 months ago

Wait, if the odds are 1:5, does that mean the probability is 50%? Because it's a coin flip, right? Oh, no, I think I'm overthinking this. Let me re-read the question carefully.

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Tequila

9 months ago

It's actually 20.00%

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Holley

9 months ago

I believe it's 16.67%

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Ciara

9 months ago

I think the probability is 20.00%

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Beth

9 months ago

D) 50.00%

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Eileen

9 months ago

C) 12.00%

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Kasandra

10 months ago

B) 20.00%

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Dominic

10 months ago

A) 16.67%

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Dorothy

11 months ago

I bet the correct answer is B) 20.00%. After all, 1 out of 6 events is a default, so the probability has to be 20%. I'm feeling confident about this one!

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Hyun

11 months ago

Hmm, let's see. If the odds are 1:5, that means the probability of default is 12%. Because the total number of possible outcomes is 6, and the number of favorable outcomes is 1. Easy peasy!

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Jeanice

10 months ago

Oh, I see. Thanks for clarifying!

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Barrie

10 months ago

Actually, it's 12.00% because the odds are 1:5.

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Veronique

11 months ago

I think the probability of default is 20.00%.

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Stephaine

12 months ago

Wait, what? If the odds are 1:5, that means the probability of default is 50%. It's a 50/50 chance, right? This question is a trick!

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Elfriede

11 months ago

The odds and probability are different. The correct answer is 20.00%.

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Claribel

11 months ago

No, the probability of default is not 50%. It's actually 20%.

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Patti

12 months ago

I'm pretty sure the probability is 20%. The odds of 1:5 means that for every 6 events, 1 of them is a default. So the probability of default is 1/6 or 20%.

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Goldie

1 year ago

Okay, let's think this through. If the odds of default are 1:5, that means the probability of default is the number of favorable outcomes (1) divided by the total number of possible outcomes (1 + 5 = 6). So the probability should be 1/6 or 16.67%.

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