PRMIA 8010 Online Access

Performance measurement at a very basic level involves comparing the return earned to the capital invested to earn that return. Risk adjusted performance measures (RAPMs) come in various varieties - and the key difference between RAPMs and traditional measures such as return on equity, return on assets etc is that RAPMs account for the risk undertaken. They may do so by either adjusting the return, or the capital, or both. They are classified as RAROCs (risk adjusted return on capital), RORACs (return on risk adjusted capital) and RARORACs (risk adjusted return on risk adjusted capital).

When a default occurs, the proportion of the exposure represented by therecovery rate is recovered. For example, if the recovery rate is 40% for a loan, the actual loss in the event of a default would be $60 for a $100 loan. In other words, the loss given default = 1 - recovery rate. Hence Choice 'd' is the correct answer. Allother choices are incorrect.

The Options Theoretic approach to calculating economic capital is a top-down approach that considers the value of capital as being equivalent to a calloption with a strike price equal to the notional value of the debt - ie, the shareholders have a call option on the assets of the firm which they can acquire by paying the debt holders a value equal to their notional claim (ie the face value of the debt).Therefore Choice 'a' is the correct answer and the other choices are incorrect.

Error rates are generally modeled using thePoisson distribution. Recall that the Poisson distribution has only one parameter - λ - which is its mean and also its variance.

In the given case, the mean number of errors is 2,000,000 x 0.005% = 100. Since this is the variance as well, the standard deviation is √100 = 10. Therefore the range of outcomes within 2 standard deviations of the mean is 100 +/- (2*10) = 80 to 120 errors in a day.