PRMIA Exam 8010 Topic 1 Question 49 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 49
Topic #: 1

[All 8010 Questions]

Financial institutions need to take volatility clustering into account:

1. To avoid taking on an undesirable level of risk

2. To know the right level of capital they need to hold

3. To meet regulatory requirements

4. To account for mean reversion in returns

A2, 3 and 4

B1 & 2

C1, 2 and 3

D1, 2 and 4

Show Suggested Answer

Suggested Answer: B

Volatility clustering leads to levels of current volatility that can be significantly different from long run averages. When volatility is running high, institutions need to shed risk, and when it is running low, they can afford to increase returns by taking on more risk for a given amount of capital. An institution's response to changes in volatility can be either to adjust risk, or capital, or both. Accounting for volatility clustering helps institutions manage their risk and capital and therefore statements I and II are correct.

Regulatory requirements do not require volatility clustering to be taken into account (at least not yet). Therefore statement III is not correct, and neither is IV which is completely unrelated to volatility clustering.

by Wai at May 31, 2024, 10:13 PM

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Selma

5 months ago

So, the answer could be C) 1, 2 and 3.

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Mertie

5 months ago

That's true. And they have to meet regulatory requirements as well.

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Chana

5 months ago

C is the correct answer, no doubt. Volatility clustering and regulatory requirements? That's financial institutions 101. Although, I did hear a rumor that one bank tried to account for it by hiring a professional yodeler. Apparently, it didn't go so well.

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Stevie

5 months ago

I agree. They also need to know the right level of capital to hold.

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Darrin

5 months ago

B is the way to go. It's all about avoiding undesirable risk and getting the capital levels right. I'm not trying to end up like one of those banks that went under during the financial crisis!

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Belen

6 months ago

I'll go with D. Accounting for mean reversion is crucial when you're dealing with volatile markets. Gotta stay on top of those ups and downs, you know?

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Aleta

4 months ago

D it is then. Gotta be prepared for those market fluctuations.

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Rose

5 months ago

Definitely, it's important to have the right level of capital and manage risk.

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Jose

5 months ago

I agree, D seems like the best choice. Mean reversion is key in volatile markets.

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Selma

6 months ago

Yes, it's important for them to avoid taking on too much risk.

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Mertie

6 months ago

I think financial institutions should consider volatility clustering.

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Deane

6 months ago

Definitely C. Volatility clustering is all about managing risk and meeting regulatory requirements. I'd hope my bank knows what level of capital it needs to hold!

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