Asset allocation

Question 1

Property & Casualty insurers are primarily focused on matching assets to the projected,
probabilistic cash flows of the risks they are underwriting. Therefore, fixed-income assets
are likely the largest component of their asset base. An allocation to higher risk assets,
such as equity, is likely much smaller

Question 2

Black–Litterman and reverse-optimization models most likely would be less concentrated in a few asset classes and less distant from the global weights.

Question 3

Wider rebalancing range

Answer 3

Higher transaction costs
higher risk tolerance
higher correlation with rest portfolio
lower volatility with rest portfolio

Question 3

Hedging/return seeking portfolio

Answer 3

simple two-step process of hedging the fixed obligation and then investing the balance of the assets in a return-seeking portfolio.

Question 4

Yale model

Answer 4

Yale model emphasizes investing in alternative assets (such as hedge funds, private equity, and real estate) as opposed to investing in traditional asset classes (such as stock and bonds)

Question 5

Factor based approach

Answer 5

In this approach factors generally have low correlations with the market and with each other. This results from the fact that the factors typically represent what is referred to as a zero (dollar) investment or self-financing investment, in which the underperforming attribute is sold short to finance an offsetting long position in the better-performing attribute. Constructing factors in this manner removes most market exposure from the factors (because of the offsetting short and long positions); as a result, the factors generally have low correlations with the market and with one another. Also, the factors commonly used in the factor-based approach are typically similar to the fundamental or structural factors used in multifactor models.