PRMIA Exam 8008 Topic 1 Question 7 Discussion

Actual exam question for PRMIA's 8008 exam

Question #: 7
Topic #: 1

When performing portfolio stress tests using hypothetical scenarios, which of the following is not generally a challenge for the risk manager?

ABuilding a consistent set of hypothetical shocks to individual risk factors

BBuilding a positive semi-definite covariance matrix

CConsidering back office capacity to deal with increased transaction volumes

DEvaluating interrelationships between counterparties when considering liquidity risks
Choice 'c' relates to operational risk and process capabilities, generally not a concern when evaluating market risk of a portfolio. Choice 'a', Choice 'b' and Choice 'd' represent real concerns for the risk manager when building stress tests for the value of a portfolio.
Choice 'a' is relevant because certain shocks may be inconsistent with each other, and therefore implausible. For example, an increase in futures prices may be inconsistent with without spot prices and/or interest rates increasing according to the no-arbitrage condition. Choice 'b' is relevant when modeling a covariance matrix in a stressed situation with higher correlations, as a hypothetical covariance matrix which is not positive semi-definite may give absurd results (negative variance). Choice 'd' is relevant as liquidity risks may affect the price that can be realized for positions held.

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Suggested Answer: C

by Fletcher at May 06, 2022, 09:14 PM

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