GARP Practice Exam 2015 Q5

[blazei]

Not sure if there is an adequate answer to my question, but figured I'd ask anyway...

In the explanation to this problem, the author comes to a calculated solution of -1.725 as the lower bound to the 95% confidence interval. This leads to the selection of c) -1.7 as the answer.

But the technical (maybe pedantic) solution, imo, would be b) -8.3 million since the question asks for a value where the surplus will be greater than or equal to. And -1.7 falls within the 95% bounds of -1.725, where -1.7 is not >= -1.725...

This scenario reminds of a question from the real Part 1 exam last year where the options were all blatantly wrong, and everyone on the forums attested to this fact afterward.

Does GARP actively review it's exam solutions and 'throw out' erroneous ones giving everyone credit? Or would it review this question, determine that b) was correct, and only give credit to those who selected b) rather than c)?

Basically, should I always pick the pedantically correct answer and hope that GARP catches its mistakes, or try and make a best guess at what GARP thought was a correct answer?

Good luck to everyone tomorrow!

 

[David Harper CFA FRM]

Hi @blazei Interesting question, here is my opinion:

• Never try to anticipate a "best guess at what GARP thought was a correct answer." If there happens to be an error on an exam question, trust it will be caught. Always seek the correct answer. Yes, GARP reviews the exam solutions, for sure.
  
• In my experience, these sample questions aren't as tight as they could be. I don't assume they are "exam-quality." In the case of this question 5, I think the important imprecision is that fact that -1.725 refers to change in the surplus. The surplus begins at $10.0 million such that I think it should be more clear they aren't looking a definition of the SaR which is $10.0 - 1.725, as the question imprecisely says "surplus value" rather than "change in surplus"
• Okay, but here the actual question is "The advisor can report that, with a confidence level of 95%, the surplus value will be greater than or equal to:" In this case, I think you should know that "greater than or equal to" is simply a clarifying phrase of VaR; i.e., 95% (s)VaR always refers to a one-sided inequality so it always means "95% of time we expect the loss not to exceed something" or "5% of the time we expect the loss to be at least something." It is too pedantic, IMO, to assume that's a qualifier on the choices given. If you run the numbers here, and you get 1.725, then by all means, select 1.7 because it's the rounded equivalent. This question, if it appeared on the exam, if you want my mere hunch, would not be phrased this way, it would be phrased something like this: "If we define the surplus at risk as the worst expected change in the surplus, which of the following is nearest to the 95.0% surplus at risk reported by the advisor?" So i definitely would not chase bad answers (try to anticipate what GARP wants), I would always seek the correct answer, but as always, read the question carefully and, if you get a choice which is rounded but matches, don't overthink that either. I hope that helps!

 

[blazei]

Ya I guess I'm more venting frustration at GARP for insufficiently accurate answers to overly pedantic questions. Especially considering that they only give out 20 sample questions for an entire year...

Meh c'est la vie

Thanks for taking the time to respond!