8008 Exam Dumps | For a group of assets known to be positively correlated, what is the impact on economic capital calculations

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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
PRMIA.8008.v2021-08-28.q125
Question 53

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Question 53/125

For a group of assets known to be positively correlated, what is the impact on economic capital calculations if we assume the assets to be independent (or uncorrelated)?

A. Economic capital estimates remain the same

B. Estimates of economic capital go down

C. Estimates of economic capital go up

D. The impact on economic capital cannot be determined in the absence of volatility information

Correct Answer: B

Explanation
By assuming the assets to be independent, we are reducing the correlation from a positive number to zero.
Reducing asset correlations reduces the combined standard deviation of the assets, and therefore reduces economic capital. Therefore Choice 'b' is the correct answer.
Note that this question could also be phrased in terms of the impact on VaR estimates, and the answer would still be the same. Both VaR and economic capital are a multiple of standard deviation, and if standard deviation goes down, both VaR and economic capital estimates will reduce.

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