PRMIA 8002 P R M Exam Questions Instant Access

Question 1

Which of the following is not a direct cause of autocorrelation or heteroskedasticity in the residuals of a regression model?

AA structural break in the dependent variable

BA high positive correlation between two explanatory variables

CThe omission of a relevant explanatory variable

DUsing an inappropriate functional form in the model

Answer : B

Question 2

Consider the linear regression model for the returns of stock A and the returns of stock B. Stock A is 50% more volatile than stock B. Which of the following statements is TRUE?

AThe stocks must be positively correlated ( )

BBeta must be positive ( )

CBeta must be greater in absolute value than the correlation of the stocks ( )

DAlpha must be positive ( )

Answer : C

Question 3

In a 2-step binomial tree, at each step the underlying price can move up by a factor of u = 1.1 or down by a factor of d = 1/u. The continuously compounded risk free interest rate over each time step is 1% and there are no dividends paid on the underlying. Use the Cox, Ross, Rubinstein parameterization to find the risk neutral probability and hence find the value of a European put option with strike 102, given that the underlying price is currently 100.

A5.19

B5.66

C6.31

D4.18

Answer : C

Question 4

What is the maximum value of the function F(x, y)=x2+y2 in the domain defined by inequalities x 1, y -2, y-x 3 ?

A29

B-25

D17

Answer : A

Question 5

A typical leptokurtotic distribution can be described as a distribution that is relative to a normal distribution

Apeaked and thin at the center and with heavy (fat) tails

Bpeaked and thin at the center and with thin tails

Cflat and thick at the center and with heavy (fat) tails

Dflat and thick at the center and with thin tails

Answer : A

Question 6

In a binomial tree lattice, at each step the underlying price can move up by a factor of u = 1.1 or down by a factor of . The continuously compounded risk free interest rate over each time step is 1% and there are no dividends paid on the underlying. The risk neutral probability for an up move is:

A0.5290

B0.5292

C0.5286

D0.5288

Answer : D

Question 7

Which of the following is consistent with the definition of a Type I error?

AThe probability of a Type I error is 100% minus the significance level

BA Type I error would have occurred if the performance of a stock was positively correlated with the performance of a hedge fund, but in a linear regression, the hypothesis of positive correlation was rejected

CA Type I error would have occurred if the performance of a stock was positively correlated with the performance of a hedge fund, but in a linear regression, the hypothesis of no correlation was rejected

DA Type I occurs whenever data series are serially correlated

Answer : B

PRMIA Mathematical Foundations of Risk Measurement :II 8002 P R M Exam Questions