8008 Exam Dumps : PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition

A situation where a firm has more liabilities than assets does not necessarily imply default, so long as the firm is able to pay its obligations when they come due. Therefore, short term debts have a greater bearing on a firm's default than longer term debt. However, this is not to say that merely having enough to pay off the short term debts (ie debts due within one year) is enough to avoid default. Over time, the long term debt will also be turning to short term debt, and it may not be possible for the firm to roll over its liabilities without lenders considering the long term debt. The KMV approach considers the entire short term debt and half of the long term debt as the critical value of assets below which default will be triggered. Therefore Choice 'c' is the correct answer.

Survivorship bias is the tendency for failed companies, funds, investments and even entire markets (eg Russian stock market returns after the Communist revolution) to be excluded from performance studies because they no longer exist. Survivorship bias results in past results looking better than they actually were as data points relating to failures are not included.

A risk manager needs to be aware of survivorship bias when basing risk analysis on historical data and should question if failures (eg failed funds, delisted companies etc) have been included in the data he or she is relying upon.

If annual variance is 0.0256, then annual volatility (ie standard deviation) is √0.0256. Therefore the daily volatility will be √0.0256/√250 = 1.01%. The other choices are not correct.