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PRMIA Operational Risk Manager (ORM) Sample Questions:

1. Which of the following credit risk models includes a consideration of macro economic variables such asunemployment, balance of payments etc to assess credit risk?

A) The actuarial approach
B) The CreditMetrics approach
C) CreditPortfolio View
D) KMV's EDF based approach

2. Which of the following statements are true:
I. Pre-settlement risk is the risk that one of the parties to a contract might default prior to the maturity date or expiry of the contract.
II. Pre-settlement risk can be partly mitigated by providing for early settlement in the agreements between the counterparties.
III. The current exposure from an OTC derivatives contract is equivalent to its current replacement value.
IV. Loan equivalent exposures are calculated even for exposures that are not loans as a practical matter for calculating credit risk exposure.

A) III and IV
B) II and III
C) II and IV
D) I, II, III and IV

3. There are three bonds in a diversified bond portfolio, whose default probabilities are independent of each other and equal to 1%, 2% and 3% respectively over a 1 year time horizon. Calculate the probability that none of the three bonds will default.

A) 0.0006%
B) 0.11%
C) 2%
D) 94%

4. Which of the following are true:
I. The total of the component VaRs for all components of a portfolio equals the portfolio VaR.
II. The total of the incremental VaRs for each position in a portfolio equals the portfolio VaR.
III. Marginal VaR and incremental VaR are identical for a $1 change in the portfolio.
IV. The VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than (or in extreme cases equal to) the sum of the individual VaRs.
V. The component VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than the sum of the individual component VaRs.

A) II and IV
B) II and V
C) I and II
D) I,III and IV

5. Which of the following statements is true:
I. When averaging quantiles of two Pareto distributions, the quantiles of theaveraged models are equal to the geometric average of the quantiles of the original models based upon the number of data items in each original model.
II. When modeling severity distributions, we can only use distributions which have fewer parameters thanthe number of datapoints we are modeling from.
III. If an internal loss data based model covers the same risks as a scenario based model, they can can be combined using the weighted average of their parameters.
IV If an internal loss model and a scenario based model address different risks, the models can be combined by taking their sums.

A) III and IV
B) II and III
C) All statements are true
D) I and II

Solutions: